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Eurozone growth 'major disappointment,' economy struggling

BRUSSELS--First-quarter growth in the eurozone was a “major disappointment,” falling well short of forecasts and stoking fresh concerns a modest recovery is struggling to make ground, official data showed on Thursday.

Worse still, the Eurostat data agency also revised down the three months to December performance — from the initially given 0.3 percent to 0.2 percent.

The 18-nation eurozone expanded 0.2 percent in the three months to March, below analyst estimates for 0.4 percent, Eurostat said.

The report “is a major disappointment as it suggests that the eurozone is still far away from reaching the escape velocity required for a sustainable recovery,” ING Bank analyst Peter van den Houte said.

The outlook is not encouraging either, with confidence indicators showing recent signs of weakness and the Chinese economy slowing.

“We believe growth is unlikely to be stronger in the second quarter ... This 'recovery' remains far too weak to halt deflationary pressures,” van den Houte said.

At the same time, the report revealed an increasing divergence between Germany, Europe's biggest economy which beat estimates with a first quarter gain of 0.8 percent, and a faltering France, which fell back further with no growth at all.

Italy meanwhile was in negative territory, with a fall of 0.1 percent while Portugal dropped 0.7 percent and the Netherlands 1.4 percent.

In stark comparison, non-euro Britain chalked up growth of 3.1 percent, the best in the full 28-member European Union.

ECB Will Have to Act

Analysts said the figures clearly increase the pressure on the European Central Bank to take more measures to stimulate growth when it next meets in June.

Demand is the key concern and as reflected in the latest inflation figures — 0.7 percent for April, a long way from the ECB's 2.0-percent target — the consumer is not loosening the purse strings.

At its meeting earlier this month, ECB head Mario Draghi hinted strongly he was ready to act to head off the looming deflation threat.

Deflation, or outright falling prices, can be fatal as it makes consumers put off purchases in the hope of paying less later.

That undercuts demand, then investment and jobs, so turning full circle to hit demand again and send the economy into a nosedive.

“In all, the figures point to a very slow recovery ... which will do little to erode spare capacity or reduce deflation risks,” Jennifer McKeown at Capital Economics said.

“This should encourage the ECB to cut interest rates next month and prepare a quantitative easing (stimulus) program for use in the near future.”

The eurozone finally escaped a record 18-month recession in the second quarter of 2013 with growth of 0.3 percent, but this slowed to 0.1 percent expansion in the third quarter.

The subsequent quarterly figures show the eurozone is not growing fast enough to cut near record unemployment levels and take up the slack in the economy.

“The best that can be said for the first quarter performance was that at least the eurozone has now managed to grow for four successive quarters,” said Howard Archer of IHS Global Insight.

Archer said the report suggested the eurozone could grow 1.1 percent this year and 1.6 percent in 2015, especially if governments ease up further on austerity and the ECB, which has already cut interest rates to record lows and provided unlimited cheap money, steps in again.

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In this July 31, 2012 photo the euro sculpture stands in front of the headquarters of the European Central Bank in Frankfurt, Germany.

(AP)

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