German Growth Slows More Than Forecast as France Picks Up

Germany’s economy slowed more than forecast at the start of the year as domestic demand struggled to make up for a drag from trade, while France grew the most in almost two years.

German gross domestic product rose 0.3 percent in the first quarter after expanding 0.7 percent in the previous three months, the Federal Statistics Office in Wiesbaden said on Wednesday. The French economy grew 0.6 percent after stagnating in the October-December period. Analysts surveyed by Bloomberg predicted growth of 0.5 percent and 0.4 percent, respectively.

“Taken together with stellar growth in the fourth quarter, the German economy is doing quite alright,” said Ralph Solveen, head of economic research at Commerzbank AG and one of two economists in Bloomberg’s survey to correctly predict the growth rate. Nevertheless, “forecasts in recent months may have been a bit on the optimistic side,” he said.

Germany, Europe’s biggest economy, is still on track to outperform the euro area over the next two years as countries such as France and Italy lag behind on the reforms needed to sustain the recovery, and Greece weighs on confidence. The European Central Bank has urged governments to use the time bought with its 1.1 trillion-euro ($1.2 trillion) asset-purchase plan to make structural adjustments to boost long-term growth.

Euro Area

The euro-area economy probably expanded 0.4 percent in the first quarter after growth of 0.3 percent in the fourth, according to a separate survey. That report is due from the European Union’s statistics office in Luxembourg at 11 a.m. today.

The Italian economy grew 0.3 percent in the first three months of the year, while Dutch growth slowed to 0.4 percent. Slovakia reported an expansion of 3.1 percent from the previous year.

The euro rose 0.4 percent to $1.1255 as of 9 a.m. London time. The German 10-year yield slipped 2 basis points to 0.66 percent.

Spain, where the government has liberalized the labor market and tackled the legacy of bad debt held by banks since being hit by the crisis, recorded its fastest growth in seven years in the quarter. The economy expanded 0.9 percent and is set to grow almost twice the speed of the euro area this year.

The European Commission raised its outlook for the region on May 5, predicting gross domestic product will increase 1.5 percent in 2015.

Brighter Outlook

“The economic situation and the short-term outlook for the euro area are currently brighter than they have been for several years,” ECB President Mario Draghi said on April 17.

In Germany, first quarter-growth was driven mainly by domestic demand, the statistics office said. Private and government consumption rose and both construction and equipment investment picked up markedly from the previous quarter. Net trade weighed on the economy. The statistics office will publish detailed data on May 22.

The Economy Ministry said on May 8 that manufacturing has stumbled in recent months as key industries such as engineering and auto construction lacked momentum. The Bundesbank has said that private consumption will support “still quite robust economic growth.”

Car Sales

Continental AG, Europe’s second-biggest maker of car parts and tires, has boosted its 2015 sales forecast three times this year and said profitability will “comfortably” reach its target. The company’s European carmaking customers, including Volkswagen AG and BMW AG, have beaten first-quarter sales and earnings estimates as the region’s auto market revives.

In France, the first quarter may mark the start of a more sustained economic revival after three years of sluggish growth. The Commission and the International Monetary Fund both see expansion of in excess of 1 percent this year, more than twice the annual pace recorded since President Francois Hollande came to power in 2012.

Greece may yet throw a spanner in the works. After months of bickering, finance ministers are still short of an agreement that would unlock bailout funds and prevent the government running out of money. ECB policy makers have signaled they’re ready to tighten Greek banks’ access to emergency funding if progress on a deal isn’t made.

Dutch Finance Minister Jeroen Dijsselbloem said after talks in Brussels on Monday that the parties are making “faster progress” toward a deal.

“Everything we hear on Greece is calculated optimism because nobody wants to take the blame for a potential exit,” said Thomas Harjes, senior economist at Barclays Plc in Frankfurt. “Now it’s time for the Greek government to decide what they want to do.”

(Source: Bloomberg)