Euro Zone First-Quarter Growth Better than Expected

Euro zone growth turned out better than expected in the first quarter, making the second-quarter slowdown more pronounced, revised data showed on Thursday.

But the European Commission forecast a third-quarter rebound, albeit weaker than projected before, and saw quarterly growth steady at around potential in the following two quarters.

The European Union's statistics office said economic growth in the 13 countries using the euro was 0.8% quarter-on- quarter in the January-March period, the same as in the bumper fourth quarter of 2006, revising the figure up from 0.7%.

Second-quarter quarterly growth, however, was confirmed at only 0.3%, caused by a drop in inventories and flat investment and government spending.

The slower growth, a global credit crunch that is undermining confidence and boosting market credit costs, as well as the strong euro are likely to stop the European Central Bank from raising interest rates further, economists said.

"We believe that the ECB will not raise interest rates any higher from their current level of 4.0%, particularly given the strength of the euro," said Howard Archer, economist at Global Insight.

A slower second quarter was one of the main reasons why the European Commission lowered its 2007 growth forecast for the currency area to 2.5% from 2.6% in September.

In its latest projection of quarterly growth in the euro zone, the Commission said it expected a third-quarter expansion in a range of 0.3-0.7% against its 0.3-0.8% forecast made on Sept. 4.

"Euro zone growth is likely to have rebounded significantly in the third quarter. Investment probably picked up markedly after its second-quarter relapse, while industrial production appears to have been stronger," Archer said.

For the fourth quarter, the Commission sees growth in the range of 0.3-0.7% against the previous projection of 0.2-0.8%, which gives the same mid-point of 0.5%.

For the first quarter of 2008, the Commission said growth would be in the range of 0.3-0.8% against the previous forecast of 0.2-0.9%, leaving the mid-point unchanged at 0.55%.

"The risk to these estimates, particularly Q4 and beyond, is to the downside in our view," said Ken Wattret, economist at BNP Paribas.

In year-on-year terms, the euro zone economy expanded at a rate of 2.5% in the second quarter, down from 3.2% in the first and 3.3% in the last quarter of 2006.

In quarterly terms, household consumption was confirmed as the main driver of second-quarter growth. It added 0.3 percentage point to the final outcome after making no contribution in the first quarter.