European expansion exceeds estimates

European economic growth accelerated more than initially estimated in the first quarter as investment and construction spending in Germany helped the region weather record oil prices, the euro's gains and market turmoil.

Gross domestic product in the 15 countries that use the euro increased 0.8 percent from the fourth quarter, compared with an earlier estimate of 0.7 percent, the European Union's statistics office in Luxembourg said yesterday. Investment jumped 1.6 percent in the first three months of this year, the most since the second quarter of 2006.

Both the German and European economies are set to slow in the current quarter as oil prices boost costs for consumers and companies and the euro's advance makes exports less competitive. The slowdown, signaled by declining measures for manufacturing and services activity and consumer confidence, may not be as sharp as in the US, reinforcing the European Central Bank's case for holding off lowering interest rates as it tries to tame inflation.

"The first quarter was an outlier and shouldn't be read as where the economy is going," said Michael Hume, chief European economist at Lehman Brothers International in London. "The services purchasing managers index has come off sharply and with the manufacturing PMI is pointing to a clear loss of momentum."

First quarter

From a year earlier, the economy expanded 2.2 percent in the first quarter. Fourth-quarter growth was revised down to 0.3 percent from 0.4 percent compared to the prior three months.

Exports rose 1.9 percent and government spending increased 0.4 percent from the prior quarter, the statistics office said in yesterday's report, the first detailed look at the first-quarter GDP data. Consumer spending gained 0.2 percent after contracting 0.1 percent in previous three months.

In the first quarter, Germany's economy expanded at the fastest pace in 12 years as construction spending jumped 4.5 percent. German builders benefited from an "exceptionally mild" winter, according to the German weather service.

Hume at Lehman forecast that the German economy will shrink in the current quarter due to a "fading construction effect" and factors including a "payback in inventories and statistical adjustments". The euro area as a whole may record zero growth this quarter, he said before yesterday's report was published.

Purchasing power

Data since the end of the first quarter have signaled growth across Europe is slowing. Retail sales in Germany unexpectedly dropped for a second month in April as faster inflation left consumers with less purchasing power, while unemployment rose for the first time in more than two years. In France, business confidence declined to the weakest in more than two years last month as rising energy prices and the euro's advance hurt the outlook for corporate profits.

The euro has risen 16 percent against the dollar in the last 12 months and reached an all-time high above $1.60 in April. Crude oil rose to a record $135.09 a barrel on May 22.

Other data suggest a more benign outlook. Germany's Ifo index of business sentiment rose in May, while European retail sales rose for the first time in three months, according to a survey of more than 1,000 executives by NTC Economics Ltd.

Still, adding to pressure on Europe's companies and households is easing demand in the US amid the fallout from the housing slump there, which pushed up credit costs worldwide. ECB council member Nout Wellink said the euro-area economy hasn't felt the full effect yet of the US slowdown.

"The impact will become visible with a certain time lag," Wellink said in Frankfurt. "The economy is slowing down a little. The full impact hasn't been visible as yet."

While economic growth is cooling, the ECB is focused on price stability, which it defines as keeping inflation just below 2 percent "over the medium term". That job has become more difficult in the last 12 months as food and oil prices soar. Consumer-price inflation accelerated to 3.6 percent last month, the fastest pace since the ECB's inception 10 years ago.

Agencies

(China Daily 06/04/2008 page16)