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Germany powers eurozone economic surge in Q1

By Pan Pylas

Associated Press

Published: Friday, May 13 2011 4:35 a.m. MDT

LONDON — Forecast-busting economic growth in Germany and a surprise rebound in Greece helped the eurozone start the new year far better than anticipated, even though Portugal sank back into recession.

Eurostat, the EU's statistics office, said Friday that the economy of the 17 countries that use the euro grew by a quarterly rate of 0.8 percent in the first three months of the year. That was more than double the 0.3 percent growth posted in the previous three-month period and ahead of analysts' expectations for a 0.6 percent increase.

In year-on-year terms, the eurozone economy grew 2.5 percent, more or less in line with what many say should be the eurozone's long-term average.

"The eurozone is therefore significantly outperforming all other major developed economies at the moment," said Chris Williamson, chief economist at Markit.

By comparison, Eurostat said the U.S. grew by a 0.4 percent quarterly rate in the first three months of the year — the U.S. uses annualized figures to collate its growth statistics.

Unsurprisingly, given its sheer size, Germany was the main reason the eurozone grew by more than expected. Its 1.5 percent growth during the quarter means the EU's largest economy has now made up all the output lost during the recession. The growth was driven by a healthy balance of exports and household spending.

"Germany is the engine of growth among industrial countries — and not just in Europe," Economy Minister Philipp Roesler said.

France, the eurozone's second-biggest economy, grew by a robust 1 percent on higher consumer spending and business investment. Northern economies like the Netherlands grew strongly, while Italy and Spain lagged behind.

Perhaps more surprisingly, given the debt quagmire it is in, Greece posted solid growth of 0.8 percent, its first economic expansion since the fourth quarter of 2009. However, the increase is unlikely a sign of a sustained rebound. The growth was artificially inflated by the fact that the previous quarter's contraction was doubled to a colossal 2.8 percent.

Manos Chatzidakis, head of investment strategy at Pegasus Securities, said the Greek figures were disappointing because of the revision and warned that much remained to be done before the economy could recover.

"The economy still has a considerable way to go before recovery," said Chatzidakis. "We remain in a very unfavorable situation."

Portugal, another bailout recipient, returned to recession. Its 0.7 percent quarterly decline follows the 0.6 percent drop recorded in the previous three-month period — a recession is classified as two consecutive quarters of negative growth. Portugal is the third eurozone country to agree to a bailout, following Greece and Ireland.

Separately, the European Commission, the EU's executive, said it expects the eurozone economy to grow 1.6 percent in 2011 following a 1.8 percent rebound in 2010. Germany is expected to grow 2.6 percent this year but Greece is anticipated to shrink another 3.5 percent this year following last year's 4.5 percent contraction.

"The main message in our forecast is that the economic recovery in Europe is solid and continues, despite recent external turbulence and tensions in the sovereign debt market," said Olli Rehn, the European Commissioner for Economic and Monetary Affairs.

The figures helped the euro, which had lost about 8 cents to the dollar this week as investors scaled back expectations of interest rate increases by the European Central Bank and worried about Greece's debt troubles.

By late morning London time, the euro was 0.4 percent higher at $1.4293, having traded as far as $1.4338 earlier. Last week, it was near 18-months high above $1.49.

Geir Moulson in Berlin and Nicholas Paphitis in Athens contributed to this report.

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