Eurozone growth slows in Q1 after extended winter

After posting its highest growth in a decade during 2017, the 19-country eurozone lost some momentum at the start of the new year, largely because of temporary factors such as the “Beast from the East” cold weather phenomenon that gripped much of Europe in late winter.

In its first estimate, Eurostat, the European Union’s statistics agency, said Wednesday that growth across the single currency bloc slowed in the first three months of the year to a quarterly rate of 0.4% from a hefty 0.7% tick the previous quarter. That is the lowest growth figure since the third quarter of 2016, when it was also 0.4%.

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Eurostat provided no explanations for the slowdown, but it was in line with economists’ expectations following a run of soft activity data attributed partly to temporary factors such as the bad weather gripping Europe in March, the acute volatility in stock markets, strikes and even a particularly nasty outbreak of flu in Germany.

However, there are some longer-term concerns such as the euro’s relative strength that may keep a lid on growth in the months to come—a higher euro can make the region’s exports more expensive in international markets. Another potential headache could come in the shape of a trade war with the U.S. if President Donald Trump goes ahead with his plan to impose a series of tariffs.

“Mounting uncertainty could translate to confidence falling further and much-needed investment being held back,” said Moritz Degler, an economist at Oxford Economics. “As such, even if a full-blown trade war does not materialize, the mere threat of it has the potential to further dent sentiment and the eurozone’s growth path this year.”

As a result of the quarterly slowdown, growth on an annual basis eased, too, though it was a still-healthy 2.5% against 2.8% in the previous quarter. That also compares favourably with the United States where the annual rate of growth stood at 2.3% during the same period.

Separately, Eurostat said unemployment across the region held steady at a near 10-year low of 8.5% in March. Overall there were 13.82 million people out of work in the eurozone, down by 83,000 on the month before.

The decline in unemployment has accelerated over the past year as the region’s recovery has gained momentum across sectors and across countries—in 2017, the eurozone was one of the standouts of the global economy, growing by 2.5%, its highest level since 2007.

The region has benefited from waning fears over debt-ridden Greece and the defeat of a run of populist—and anti-euro politicians in elections in France and the Netherlands.

The improving employment backdrop should help the region deal with changes related to the impact of fluctuations in the value of the euro, which currently stands at around $1.20.

“With more people in work and rising wages, domestic demand should be able to absorb some of the fluctuations in international markets for euro area products,” said Kay Daniel Neufeld, managing economist at the Centre for Economics and Business Research.

Though the European Central Bank has been encouraged by the economy’s momentum, it’s still pursuing crisis-era policies in order to get the annual rate of inflation back to its goal of just below 2%.

Financial markets think the bank will start reining in those policies when inflation is showing clear signs of settling around that level. Figures Thursday are set to show inflation rising modestly to 1.4% from 1.3% in March.

Anything substantially higher could prompt some to mull the possibility the ECB will bring forward the end of its bond-buying program and start reversing its interest rate cuts, which have seen its main rate slashed to zero.

The Associated Press

The Associated Press is an American not-for-profit news agency headquartered in New York City and founded in 1846.