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German GDP growth shines, Europe stands tall


Thursday, May 15, 2008

PARIS — Stunning German growth and a surge in France produced a defiantly healthy showing from Europe when estimates of economic growth for the first three months of 2008 were published on Thursday.

Economists said that may be the end of it as Europe succumbs to an international downturn, but the news showed that, thanks to business investment, the region started the year in much better form than the almost stagnating U.S. economy.

There were worry signs behind the headline results, notably weakness in consumer demand as commodity price inflation pushed up the cost of fuel, food and the cost of living generally.

The big surprise was Germany, where gross domestic product growth of 1.5 per cent compared with the final three months of 2007 was twice the pace anticipated by economists, several of whom described the news as sensational.

Corporate investment was the main reason for the five-fold rise in the quarter-on-quarter growth rate from 0.3 per cent in the last three months of 2007, the statistics office said. It did not provide a detailed breakdown.

After those figures it was little surprise when the European Union's statistics office said growth for the euro zone overall beat forecasts, up 0.7 per cent from the last quarter of 2007.

The faster than expected expansion for the first few months of the year in much of mainland Europe contrasted with next to no growth in a U.S. economy hit by a severe housing slump.

First-quarter GDP estimates there show the economy grew 0.2 per cent when the official figure is translated into a measure comparable with the estimates published in Europe.

France's economic growth in the first three months of the year was a healthy 0.6 per cent, compared with the preceding quarter, the statistics office there said.

In France, like Germany, corporate investment was behind the overall rise, along with a better result from foreign trade.

More worryingly, consumer demand, traditionally a stronger source of growth for France than for export-dependent Germany, stagnated in the quarter.

Many companies such as Unilever and Nestle have raised the price of their goods, passing the bill on to consumers for the impact that high worldwide commodity prices are having on their costs in raw materials.

The European Statistics office, Eurostat, released estimates for GDP in many countries as well as a confirmation that the annual inflation rate in the euro zone was 3.3 per cent in April, below the record 3.6 per cent of March.

The figure remains well above the European Central Bank's two-per cent limit for what is allowable over the medium term, fuelled mainly by increases in energy prices and the cost of food, alcohol and tobacco.

Among smaller economies, Austria's first-quarter GDP growth came in at 0.8 per cent and Greece's at 1.1, but there were also some bad scores.

Portugal's GDP shrank slightly, losing 0.2 per cent from the last quarter of 2007, and the Dutch economy failed to repeat the strong show of late 2007, producing a GDP rise of just 0.2 per cent in the first three months of this year.

Despite a German performance analysts described as “amazing” or “sensational,” officials in Europe have already acknowledged that the following quarters will show slower rates of activity, even if politicians insist it is a slowdown not a slump.

Carsten Brzeski, an economist for Dutch finance group ING, said it was possible Germany economic growth would even hit standstill in the second quarter.

“A Chinese proverb says that it is better to light a candle than to curse the darkness,” he said. “However, at the current juncture one should not be blinded by the German GDP numbers.

Among economies more dependent on housing markets to spur consumer spending, the news is not so encouraging.

In Spain, where growth had outstripped the euro zone average for a decade, data on Wednesday showed first quarter growth slid to 0.3 per cent over the previous quarter – the weakest the country has seen since 1993, a recession year.

There, as in Ireland, and Britain, housing booms have been perhaps the biggest reason for brisker growth rates than in much of mainland Western Europe in the past decade, but signs now are that the boom is well and truly over.

British growth slowed in the first quarter to 0.4 per cent from 0.6 per cent in the last quarter of 2007 and central bank chief Mervyn King said on Wednesday the country should brace for continued house price falls, and possibly a quarter or two of economic contraction.

© The Globe and Mail

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