Europe News

Euro zone data deluge: Better-than-expected growth, but we're back in deflation

The euro zone showed a mixed picture of health on Friday with the economy growing solidly and unemployment falling slightly while consumer prices fell yet again into deflation territory.

The flash estimate for euro zone gross domestic product rose 0.6 percent in the first quarter from the previous quarter, above expectations for an expansion of 0.4 percent, according to the European Union's statistics service Eurostat. Meanwhile, unemployment in the euro zone for March fell slightly to 10.2 percent – the lowest rate recorded in the region since August 2011 – from 10.4 percent in the previous month.

Gloomier news came on the inflation front, however, with the latest flash estimate showing that consumer prices fell 0.2 percent in April, from a flat reading of 0.0 percent in March. On an annual basis, core inflation (which strips out volatile prices such as those for oil and food) rose 0.8 percent in April.

Most analysts had predicted that euro zone GDP would have risen 0.4 percent quarter-on-quarter, up from 0.3 percent in the fourth quarter.


The data dump comes after the European Central Bank unleashed further stimulus measures in March in a bid to stimulate growth and inflation, which is currently a way off from the bank's target of below, but close to, 2 percent.

As well as cutting its main interest rates to zero and cutting a key bank deposit rate further into negative territory, it expanded its massive bond-buying program to 80 billion euros ($90.3 billion) a month and added corporate bonds into the mix.

The latest data posed a "a question for the ECB," Pernille Bomholdt Henneberg, senior analyst at Danske Bank Markets, told CNBC Friday.

"At the moment they are very patient and waiting to see the measures they have taken kicking in but they have to wait a long time because inflation will stay low for a very long time, that's what we have seen confirmed by the data today," she said.

She said that a higher oil price would support the ECB's view of higher inflation but that "the most important thing to follow is core inflation because that's very much dependent on the economic situation and higher wage growth and we're not seeing that at the moment."

Stimulus to 'kick in'?

Economists like Howard Archer, chief U.K. and European economist at IHS Global Insight, said there were a "number of positives for euro zone growth" and that extra ECB stimulus would start to "kick in" soon.

"While they have firmed recently, oil and commodity prices and the euro are still at levels that are supportive to euro zone growth. Major ECB stimulus that was enhanced in March will increasingly kick in over the coming months, while the fiscal stance across the euro zone is gradually becoming more growth orientated with increasing fiscal stimulative measures being introduced in a number of countries (along with increased public spending to deal with the influx of migrants)" he said in a note on Thursday.

"Meanwhile, generally improved job markets across the euro zone are supportive to consumer spending along with the boost to purchasing power coming from negligible deflation/inflation."

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