Drag in euro zone recovery in Q1 supports call for strong ECB action

Written by Reuters | Brussels/London | Updated: Jun 6 2014, 02:40am hrs
A slowdown in the euro zones economic recovery in the first quarter was confirmed on Wednesday, likely reinforcing calls for bold action by the European Central Bank this week to fight low inflation and high unemployment.

The 18-nation blocs economy expanded by just 0.2% in the three months to March, the EUs statistics office Eurostat said, illustrating the fragility of the rebound.

Growth in the first quarter rise was mainly due to Germany, which compensated the stagnation in France and the shrinking output in Italy, the Netherlands, Portugal and Finland.

The quarterly rise was driven mainly by change in inventories, along with domestic and government consumption and exports. Imports did little to help the economy.

When compared with the same period of last year, the economy grew by 0.9%, its second consecutive annual expansion after a 0.5% increase in the last quarter of 2013.

Germany, the euro zones largest economy, grew by a sound 0.8% in the first quarter, with economists expecting pace of the expansion to slow in the coming months.

ECB policymakers have flagged a policy move for their meeting on Thursday and the banks president, Mario Draghi, said last week the ECB was well equipped to get inflation back to its target

just below 2%.

Markits Composite Purchasing Managers Index (PMI) showed that while output across the bloc remained solid in May the pace of growth eased despite output prices falling for the 26th straight month.

Todays PMIs remain consistent with some recovery in the euro zone, said Annalisa Piazza at Newedge Strategy.

Annual euro zone inflation, which the ECB prefers to be just under 2%, fell unexpectedly in May to just 0.5%, increasing the risks of deflation and making a policy response on Thursday a virtual certainty.

Industrial producer prices fell as expected both on the month and on a year ago in April, Eurostat also said on Wednesday.

In Britain, which does not use the euro, the services industry expanded faster than expected in May, and hiring notched a 17-year high, adding to a debate at the BoE about how soon it should raise rates.