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Eurozone growth of 0.2 per cent falls short of expectations, Germany offset by France

FILE - In this July 31, 2012 file photo the euro sculpture stands in front of the headquarters of the European Central Bank, ECB, in Frankfurt, Germany. Europe's economy failed to gain any momentum in the first quarter, solidifying expectations that the European Central Bank will soon back fresh stimulus measures to shore up the recovery. (AP Photo/Michael Probst, File)

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FILE - In this July 31, 2012 file photo the euro sculpture stands in front of the headquarters of the European Central Bank, ECB, in Frankfurt, Germany. Europe's economy failed to gain any momentum in the first quarter, solidifying expectations that the European Central Bank will soon back fresh stimulus measures to shore up the recovery. (AP Photo/Michael Probst, File)

FRANKFURT - Europe's economy failed to gain any momentum in the first quarter, reinforcing expectations that the European Central Bank will soon deploy fresh stimulus measures to shore up the tepid recovery.

The economy of the 18 countries that share the euro saw output grow by only 0.2 per cent in the first quarter from the previous three-month period, the EU statistics office said Thursday

That marked the fourth straight quarter of expansion. But the rise was below economists' expectations for 0.4 per cent.

The slack eurozone nonetheless outperformed the United States, where stormy and cold winter weather meant there was no growth at all, according to Eurostat.

A large chunk of the blame can be placed on a flat performance in France, Europe's second largest economy behind Germany. Between them, the two make up roughly half of the eurozone economy. France has lagged in reducing worker protections and cutting labour costs for business — steps that have benefited other eurozone economies.

A dismal 1.4 per cent contraction in the Netherlands and a 0.1 per cent decline in Italy did not help, either. Elsewhere, Portugal's economy slipped even as the country prepares to leave its bailout aid program on May 17. Greece, its economy ravaged by excess debt and brutal austerity, saw its output decline in annual terms by 1.1 per cent. Greece doesn't provide quarter figures but the annual rate of contraction has been diminishing for a year now. There are hopes now that the country at the forefront of Europe's debt crisis will soon be recording some growth.

Without a stellar 0.8 per cent rise in Germany and a solid 0.4 per cent improvement in Spain, there may not even have been any growth in the eurozone.

Tom Rogers, senior economic adviser to the EY eurozone forecast, said the numbers "should act as a wake-up call for any eurozone policy makers tempted towards complacency about the road to recovery."

"Stagnating output in Italy and France, two of the four largest economies, is in large part a result of deteriorating cost-competitiveness, while Germany and Spain continue to reap rewards from reform implemented either well before the crisis, or more recently," he added.

Thursday's figures are likely to strengthen arguments for the European Central Bank to cut interest rates and take further stimulus measure at its next meeting June 5. The markets certainly think so and the euro was down another 0.4 per cent at $1.3665. A week ago, the euro was heading toward the $1.40 mark for the first time in 2-1/2 years.

The ECB could cut its benchmark interest rate from what is already a record low of 0.25 per cent. It could also impose a negative interest rate for money banks deposit at the central bank, a step aimed at increasing loans to households and businesses. The ECB could also purchase government or corporate bonds on financial markets to add to the supply of money in the economy.

All those steps could help increase an inflation rate of 0.7 per cent, which is well below the ECB's goal of just under 2 per cent. Low inflation makes it harder for indebted governments to reduce their burdens. It has also raised fears that the eurozone may fall into outright deflation, a crippling downward price spiral that kills growth and business investment.

"The debate over 'whether' to act is surely over and it is now just a question of 'how' to act," said James Ashley, chief European economist at RBC Capital Markets.

The larger 28-country European Union grew by a slightly faster 0.3 per cent from the quarter before, up 1.4 per cent from the same quarter a year ago. The full EU performance was boosted by a 0.8 quarterly increase in Britain.

The EU doesn't publish annualized figures that show what the quarter's growth would translate to for the full year.

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