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Eurozone bounces back from recession as inflation steadies

The eurozone economy bounced back from a slight recession in the first quarter as Germany saw growth returning and expansion picked up in other regions, while inflation steadied to further reinforce the case for the European Central Bank (ECB) to cut interest rates.

Gross domestic product (GDP) in the 20-country bloc increased by 0.3% quarter-over-quarter in January-March for a 0.5% year-over-year rise, official data showed on Tuesday, compared with market expectations that both would expand by 0.2%.

The fourth quarter GDP figure was also revised down to negative 0.1% from 0.0%, meaning that the eurozone was in a technical recession in the second half of 2023. GDP shrank by 0.1% in the third quarter.

The figures reflect general expectations of a slow recovery in the eurozone. The International Monetary Fund (IMF) forecast earlier this month that the bloc’s GDP would rise by 0.8% this year, double the rate of 2023 and by a healthier 1.5% in 2025

The eurozone’s annual rate of inflation remained unchanged at 2.4% in April from the previous month, in line with economists’ expectations.

The figure means the rate is close to the ECB’s 2% target.

However, a crucial indicator of underlying price pressures slowed, solidifying a strong case for the European Central Bank to cut interest rates at its meeting on June 6, just as the EU public started voting in the European Parliament election.

Core inflation, which strips out volatile energy, food, alcohol and tobacco prices and is a key indicator of the central bank, slowed to 2.7% in April, from 2.9% in March.

Eurozone inflation has significantly fallen from its peak of 10.6% in October 2022, following Russia’s assault on Ukraine and the ensuing energy crisis.

The ECB aggressively hiked rates from July 2022 to tame soaring price rises but has frozen borrowing costs in the past few months amid growing calls for a rate cut.

“We still expect a first cut in June, but the Bank will remain extremely cautious,” ING bank analyst Bert Colijn said.

‘Worst is finally behind’

EU statistics agency Eurostat showed growth in all 10 countries, from which it compiled data for a flash estimate for the bloc. Growth rates were at least equal to those of the fourth quarter.

IMF chief Kristalina Georgieva, who was in Brussels for meetings with EU officials, said she was “optimistic” about Europe’s growth.

“It is actually growing. The economy is in positive territory despite the energy shock,” she told journalists.

She, however, warned of “two big clouds that are hanging over our heads,” pointing to “slow growth” and “growing divergence” as low-income countries fall behind the richest.

She also noted that “inflation is going down, but it’s not over.”

Germany returned to growth in the first quarter with a bigger-than-expected 0.2% expansion from the previous quarter due to exports and construction investment, which were boosted by unusually mild winter weather.

“Optimism has returned to the German economy,” ING bank analyst Carsten Brzeski said after the eurozone’s largest economy dodged a recession.

However, fourth quarter numbers were revised to show a deeper dip at the end of 2023.

“The worst is finally behind us,” was UniCredit’s assessment, saying rising trade and lower inflation would likely lead to moderate German growth in the coming quarters.

Spain’s economy grew by 0.7% quarter-over-quarter, beating analysts’ forecasts for 0.4% growth due to a boost in investment and private consumption. Investment growth had been weak in previous quarters despite the deployment of European recovery funds. Industry and construction expanded in the quarter.

The French economy also gained momentum in January-March, growing slightly faster than expected thanks to a pick-up in consumer spending and business investment.

The growth is good news for the French government, which drew fierce criticism from the opposition for handling the economy after it revised its 2024 growth forecast in February.

“To all of those who wanted to think our economy has stalled, the facts are stubborn: French growth is improving,” Finance Minister Bruno Le Maire said.

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