Eurozone economy grows by modest 0.2 percent in Q1

[May 12, 2010]  LONDON (AP) -- The economy of the 16 countries that use the euro currency grew modestly during the first quarter of the year, despite a further big drop in output in debt-laden Greece.

The economy grew by 0.2 percent in the first three months of the year compared to the previous quarter, EU statistics agency Eurostat said Wednesday.

The modest rise follows zero growth in the fourth quarter of 2009 and highlights how slowly the world's second largest economy is emerging from recession as it struggles to contain a government debt crisis that has shaken confidence in the euro currency.

The tepid recovery contrasts with that of the U.S., which saw output rise by a quarterly rate of 0.8 percent in the first quarter, according to Eurostat.

The eurozone economy still has a long way to go to make up for the output lost during the recession and the debt problems afflicting a number of economies isn't going to help matters in the months ahead. Governments will face pressure to cut spending and raise taxes to relieve their debt problems -- which will remove government stimulus from the economy and could undermine growth further.

"Q1's modest rise confirms that the economic recovery in the region has failed to gain any real momentum even before the painful fiscal consolidation faced by many economies has begun," said Jennifer McKeown, senior European economist at Capital Economics.

Germany, the eurozone's biggest economy, saw output rise by 0.2 percent, while France, the second-largest, grew by 0.1 percent. Italy returned to growth with a 0.5 percent quarterly rise.

The increases recorded in the three largest eurozone economies helped to offset the 0.8 percent contraction in Greece, which is in the process of being bailed out from the verge of government default by its partners in the eurozone and the International Monetary Fund.

Most economists think that growth primarily came from the industrial sector as global trade perked up -- separate figures from Eurostat showed that industrial production in the eurozone spiked by 1.3 percent in March from the previous month.

Despite the crisis that has afflicted Greece and the austerity measures that are set to be introduced in a number of countries -- Spain's Prime Minister Jose Luis Rodriguez Zapatero announced further spending cuts earlier -- there are some hopes that the recovery in the eurozone may pick up steam in the near term, partly because of the sharp fall in the value of the euro.

The single currency has dropped from a high above $1.50 last November to around $1.27 -- in the context of a growing global economy that would, all other things being equal, boost exports by making European goods comparatively cheaper.

"We expect economic growth to pick up strongly in the current quarter as activity data is catching up with buoyant business confidence surveys and the weaker euro is boosting exports," said Frederik Ducrozet, eurozone economist at Credit Agricole. "

"The escalation of the euro sovereign crisis should take its toll on business confidence and activity only later this year," he added.

Eurostat also said that the 27-country EU, which includes non-euro members such as Britain and Sweden, also grew by a quarterly rate of 0.2 percent -- dramatic declines were recorded in Estonia and Lithuania, which saw output plunge 2.3 percent and 4.1 percent respectively.

[Associated Press; By PAN PYLAS]

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