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Construction workers are silhouetted while standing on scaffolding at the construction site of the new headquarters of the European Central Bank (ECB). (KAI PFAFFENBACH/REUTERS)
Construction workers are silhouetted while standing on scaffolding at the construction site of the new headquarters of the European Central Bank (ECB). (KAI PFAFFENBACH/REUTERS)

Euro zone’s GDP growth disappoints, inflation in ‘danger zone’ Add to ...

Euro zone economic growth was much weaker than expected in the first quarter and inflation remained locked in the ‘danger zone’ below 1 per cent in April despite a modest pick-up, data showed on Thursday.

The European Union’s Statistics Office estimated that the economy of the 18 countries sharing the euro expanded only 0.2 per cent on the quarter in the first three months of the year, rather than the 0.4 per cent growth expected by economists.

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Eurostat also revised down the economic growth rate for the last three months of 2013 to 0.2 per cent quarter-on-quarter from 0.3 per cent.

The weaker-than-expected economic growth adds to pressure on the European Central Bank to loosen monetary policy further to reduce the risks of deflation in a barely growing economy.

A breakdown by country of economic growth showed the overall picture in the euro zone was mixed.

Germany posted strong growth in the first quarter of the year in stark contrast to France, which stagnated and to Italy, the third largest economy, which contracted.

Analysts had expected the euro zone economy to slow in the second quarter after picking up in the first.

Soft indicators, like weak industrial orders and business morale, illustrate how the 9.5 trillion euro economy struggles to gain stronger momentum, against the headwinds of as high unemployment and geo-political risks like the crisis in Ukraine.

Separately, Eurostat confirmed that inflation accelerated in April to 0.7 per cent on the year from 0.5 per cent in March.

But is still what the ECB calls the “danger zone” of below 1 per cent, and well below the ECB’s target of close to, but below 2 per cent.

Inflation was kept low mainly by falling prices of fuel for transport, as well as less expensive telecommunication services and vegetable costs, offsetting more costly packaged holidays, tobacco and electricity.

Inflation rose 0.2 per cent month-on-month in April, with core inflation – which excludes energy and unprocessed food, – rising by 0.2 per cent.

The strength of the euro, currently trading 14 per cent stronger than its lows in the summer of 2012, is a large factor in keeping price growth subdued.

The ECB, which sees no outright risk of a deflation in the currency bloc, said it was ready to deploy all conventional and unconventional measures to fight low inflation, which is expected to stay below target until 2016.

The bank is preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small– and mid-sized firms (SMEs), people familiar with the matter told Reuters.

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