Growth slows and prices rise as stagflation stalks eurozone

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Growth in the eurozone economy weakened during the first quarter while inflation inched up to a new record in April, raising the spectre of stagflation in a region blighted by soaring energy and food prices.

Gross domestic product in the 19 countries that share the euro grew 0.2 per cent in the first three months of the year, compared with 0.3 per cent in the previous quarter, Eurostat said on Friday. Economists polled by Reuters had on average forecast growth to remain stable.

France’s economy stagnated in the first quarter while Italian output contracted. The Spanish economy also lost pace. Germany was the only one of the four biggest EU economies to beat expectations in the first three months of this year, but posted meagre growth of 0.2 per cent from the previous three months.

Inflation in the eurozone was 7.5 per cent in the year to April, up from a record high of 7.4 per cent in the previous month, Eurostat said in a separate release. Energy prices rose 38 per cent, while unprocessed food prices jumped 9.2 per cent. Core inflation, excluding energy and fuel, increased to 3.5 per cent, up from 2.9 per cent.

The data show price pressures continue to build in the eurozone, keeping inflation well above the European Central Bank’s 2 per cent target and feeding calls for it to accelerate plans to reverse its ultra-loose monetary policy.

Line chart of Real GDP, rebased Q4 2019=100 showing Eurozone economic growth weakens

Russia’s invasion of Ukraine has clouded the outlook for Europe’s economy. Economists fear an escalation of western sanctions on Moscow risks leading to shortages of gas that would hit industry hard and send energy prices even higher, eroding household income and sapping consumer confidence.

“We think eurozone GDP is likely to contract in the second quarter as fallout from the Ukraine war and surging energy prices take an increasing toll on households’ real incomes and consumer confidence as well as exacerbating supply-side problems,” said Andrew Kenningham, an economist at Capital Economics.

The eurozone’s 0.2 per cent first-quarter growth compares favourably with a 0.4 per cent contraction in the US economy, caused by a record-high trade imbalance and weaker inventory growth that offset higher spending by consumers and businesses in the period. But it lagged behind a 1.3 per cent expansion in China’s economy over the opening three months of the year.

Soaring consumer prices, continued pandemic restrictions and the fallout from the Ukraine war all took their toll on economic activity in the first three months of this year, causing Italy’s economy to shrink 0.2 per cent, while France had zero growth and Spanish growth slowed to 0.3 per cent.

The flatlining of French GDP in the first quarter marks a sharp slowdown from the upgraded 0.8 per cent growth rate in the final three months of last year. Economists polled by Reuters had on average forecast first-quarter growth of 0.3 per cent.

Line chart of Annual % change in consumer price index showing Eurozone inflation rises to a new record high

The French national statistics office said on Friday that output was hit by a 1.3 per cent fall in household spending, which offset a 0.2 per cent increase in investment, while changes in inventories added 0.4 percentage points to growth and trade contributed 0.1 points.

Germany’s 0.2 per cent rise in first-quarter GDP marked a rebound from a 0.3 per cent contraction in the previous quarter, meaning Europe’s largest economy avoided a technical recession, defined as two consecutive quarters of negative growth. Economists polled by Reuters had on average expected growth of 0.1 per cent.

The federal statistical agency said the expansion of the economy was “mainly due” to higher investment, while trade had a negative impact on growth. It said GDP was still 0.9 per cent below its pre-pandemic level in the final quarter of 2019.

“The economic consequences of the war in Ukraine have had a growing impact on the short-term economic development since late February,” it said, adding that the GDP data were subject to “larger uncertainties than usual”.

Line chart of GDP index rebased, Q4 2019=100 showing Eurozone economic rebound lags behind other countries

Italy’s 0.2 per cent drop in GDP partially reversed the 0.6 per cent expansion in the previous quarter and left overall output 0.4 per cent below pre-pandemic levels, according to the office for national statistics. The contraction was in line with analysts’ expectations.

Spanish quarterly GDP growth of 0.3 per cent was a marked slowdown from the 2.2 per cent expansion between the third and fourth quarter of last year. It also undershot the 0.5 per cent expansion forecast by economists polled by Reuters.

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