Slow eurozone growth adds to pressure on ECB to act

The eurozone recovery failed to gather momentum last quarter, as France unexpectedly stalled and economies from Italy to the Netherlands shrank.

Growth of just 0.2% for the currency bloc, half as much as economists had forecast, adds pressure on the ECB to deliver stimulus measures next month in its battle against weak inflation and anaemic output.

While German expansion doubled to 0.8%, that wasn’t enough to offset renewed weakness across the region, including a 0.7% drop in Portugal.

ECB president Mario Draghi primed investors last week for further stimulus in June, saying the 24-member governing council is “comfortable with acting” next month.

With the eurozone’s recovery from a record-long recession still fragile, officials are battling to revive price growth, with the inflation rate at less than half the ECB’s target.

“The recovery is still more or less in train in most countries, but the headline number is disappointing and the horror show was the Dutch number,” said Richard Barwell, an economist at Royal Bank of Scotland Group in London.

“We think the ECB is going to act in June, and we think it will be a package of measures.”

Dutch GDP fell 1.4% in the first quarter, the sharpest contraction in the eurozone, Eurostat said yesterday.

The Italian and Finnish economies shrank 0.1% and 0.4%, respectively.

The unemployment rate was 11.8% for a fourth month in March, near the all-time high of 12% last year. The annual inflation rate was 0.7% in April, Eurostat said yesterday in a separate report.

Even in Germany, there are signs of a potential slowdown in the second quarter.

The ZEW Centre for European Economic Research in Mannheim, said its index of investor expectations slid for a fifth month in May to the lowest since January 2013.

The Bundesbank has warned that while the economy shows an upward trend, growth will slow “noticeably” in the three months through June.

The eurozone recovery is “proceeding at a slow pace and it still remains fairly modest,” Mr Draghi said last week in Brussels after the ECB left its benchmark rate at 0.25% and its deposit rate at zero. “There is consensus about being dissatisfied with the projected path of inflation.”

While officials have stressed that no decision on policy action in June has been made, economists from BNP Paribas to Goldman Sachs and Royal Bank of Scotland predict the ECB will cut interest rates.

Should the ECB decide to act, it might deploy multiple tools rather than just reducing borrowing costs. Options include offering more long-term loans to banks or halting the sterilisation of liquidity from crisis-era bond purchases under the Securities Markets Programme.

Mr Draghi will present revised macroeconomic forecasts when policy makers meet in Frankfurt in June. The ECB predicted in March GDP will rise 1.2% this year, 1.5% in 2015 and 1.8% in 2016. Inflation is projected at 1% in 2014, accelerating to 1.5% in 2016.

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