Weak data undercuts optimism on euro zone economy strength

[February 14, 2017]  By Francesco Guarascio

BRUSSELS (Reuters) - Optimism about the strength of the euro zone economy took a hit on Tuesday as data showed lower-than-expected growth, possibly caused by weaker global trade as protectionist calls grow louder.

The gross domestic product (GDP) of the 19 countries sharing the euro grew 0.4 percent on the quarter in the last three months of 2016, revised down from an earlier estimate of 0.5 percent.

The new estimates mirrored data released in Germany, the bloc's largest economy, which also grew 0.4 percent on the quarter, below market expectations of a 0.5 percent increase.

Although lower than expected, the German data showed a rebound from a near-stall (0.1 percent) in the previous quarter.

Euro zone growth maintained the same quarterly pace as in the previous quarter. On a year-on-year basis, it slowed to 1.7 percent from the 1.8 percent recorded in the third quarter.

Economists were disappointed by the figures, pointing to the reduced contribution of exports to the euro zone economy.

Available data "suggest that a positive contribution from domestic demand may have been offset by weak net trade," said Jessica Hinds of Capital Economics.

Howard Archer of IHS Markit said: "It is apparent that growth was very much domestic-demand led – this was certainly true of Germany, France and Italy."

In economic forecasts released on Monday, the European Commission said risks to growth this year included potential trade disruption under U.S. President Donald Trump, who has argued for more protectionist policies.

Cranes are seen at a construction site in north Madrid, Spain January 23, 2017. REUTERS/Juan Medina

The new figures may strengthen the hand of those European Central Bank board members who are reluctant to reverse in the medium term its very accommodating monetary policy, despite a pick-up in prices. Inflation was 1.8 percent in January, nearing the ECB's target of "below, but close to 2 percent".
 

INDUSTRY BRAKES

The euro zone GDP growth revision was partly due to a large drop in industry output in December. It was 1.6 percent lower than in November, the steepest fall in more than four years.

This was mostly due to a 3.3 percent decline in the production of capital goods like machinery, a sign of decreasing appetite for long-term investment.

Output fell also in the energy sector, non-durable consumer goods and intermediate goods.

Production of durable consumer goods, such as cars and refrigerators, was the only component of the indicator that went up. It recorded a 2.9 percent rise, in a sign of managers' confidence that consumers will spend more on durable goods.

(Editing by Mark Trevelyan)

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