Eurozone "astonishes" with GDP growth, but inflation still too low

The eurozone's economy grew by a better-than-expected 0.6 per cent in the first three months of this year, but prices of goods and services were back in decline despite efforts to boost inflation, data released on Friday showed.

"The [growth] figures provide a pleasant surprise. ... But we've seen enough false dawns to hesitate before concluding that the eurozone economy has embarked on a solid and sustained recovery," said Jonathan Loynes of the Capital Economics research group.

The 19-country European currency bloc emerged from recession nearly three years ago.

In the first quarter of 2016, its output expanded at double the pace from the previous two quarters, when its gross domestic product (GDP) rose by only 0.3 per cent, according to a preliminary estimate from the European Union's statistics office, Eurostat.

Even with growth slowdown concerns for the US, China and several emerging markets, and weak confidence among its consumers and businesses, the "eurozone economy astonishes in the first quarter," ING bank senior economist Bert Colijn wrote in a note to clients.

Analysts had predicted quarterly growth of 0.4 per cent.

But at the same time, the eurozone has been dogged by fears of deflation.

Inflation fell back below zero in April, with the prices of goods and services declining by 0.2 per cent year-on-year, Eurostat said in a new estimate. It was the second time this year that the rate crossed into negative territory on the back of falling energy prices.

But the fact that there has not been an across-the-board drop in price levels has led EU officials to argue that the eurozone is not in deflation.

The European Central Bank (ECB) has already implemented a series of measures to push the inflation rate back up to its annual target of just below 2 per cent. ECB chief Mario Draghi earlier this month kept open the door to a new round of monetary stimulus to help boost consumer prices and economic growth.

Danske Bank analyst Pernille Bomholdt Henneberg predicted that the central bank will prolong bond purchases under its quantitative easing programme beyond March 2017 because inflation "will not pick up sufficiently for the ECB to remain on hold."

ING bank analyst Teunis Brosens, however, said he expects inflation to start increasing in the second half of the year due to rising oil prices.

"We could very well see the end of zero headline inflation in a few months' time," he said.

The April drop was driven by energy prices, which fell 8.6 per cent on the year after dropping 8.7 per cent in March, Eurostat said.

Eurozone inflation had already slipped briefly into negative territory in February.

The currency bloc has also been slow in whittling down its jobless ranks, although progress has been made since its unemployment rate hit a record 12.1 per cent in 2013.

In March, it fell to 10.2 per cent, exceeding analysts' expectations and reaching its lowest level in nearly five years, new data released by Eurostat showed.

But many still consider the number of people out of work to be unacceptably high. More than 16 million people were jobless in the eurozone in March, 2.9 million of them under the age of 25.

Last update: Fri, 24/06/2016 - 08:49

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