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Euro zone growth beats expectations as Italy edges out of recession

Key Points
  • Growth data is under the spotlight after lackluster data recently.
  • In the fourth quarter of 2018, economic growth was confirmed at 0.2% quarter-on-quarter.
  • For the first quarter of 2019, most analysts predicted growth of between 0.2% and 0.4%.
Grant V. Faint | Getty Images

European investors are focused on the latest growth data from the region due on Tuesday, with investors looking for hints of a further slowdown — or a recovery — following a spate of lackluster figures.

Flash (preliminary) growth data from the region showed the economy grew 0.4% in the first quarter, up from 0.2% in the fourth quarter of 2018 and up from a 0.1% figure for the third quarter.

Most analysts predicted preliminary growth of between 0.2% and 0.4%. Analysts polled by Reuters predicted 0.3%.

Earlier Tuesday, Spain posted preliminary data showing a 0.7% expansion in the first quarter, and France posted 0.3% growth. Later, Italy posted 0.2% growth quarter on quarter, beating expectations.

Eurostat, the bloc's statistics body, also posted the latest unemployment figures for March, with the jobless rate at 7.7%, down from 7.8% in February.

It's not an easy time for the euro zone with flat growth in Germany and a short-lived recession in Italy worrying investors. There has been a gloomy raft of data recently ranging from industrial production to weak composite purchasing managers' indexes (PMIs). The last flash services and manufacturing PMI stood at 51.3 in April, down from 51.6 in March, with the latest reading the third-lowest since November 2014.

IHS Markit, which compiles the PMI data, said new order growth remained close to stagnant, new export orders fell sharply, manufacturing output fell, and employment growth picked up only slightly.

Business expectations were also gloomy with political uncertainty, including Brexit, trade wars and protectionism all weighing on sentiment. IHS expected growth of around 0.2% in the first quarter.

On Monday, data released showed that economic sentiment decreased "markedly" in both the euro zone and the wider EU in April.

It's not all been bad news, however. Other data released in recent weeks have shown modest growth in construction activity and euro zone retail sales that continue to surpass expectations.

'All that glitters is not gold'

Economist Lorenzo Codogno warned that even if there was the "potential for upside surprises" in the GDP data Tuesday "all that glitters is not gold."

"It is not a turning point. There is clear evidence of a trade-related exogenous shock for the euro zone economy, which cannot be easily dismissed in the aftermath of a good GDP reading," Codogno, the founder and chief economist at LC Macro Advisors, said in a note Monday.

"Soft leading indicators tend to anticipate economic developments, and recent surprising resilience of hard data do nothing to dispel the risk of a downturn in the coming months," he said, noting that a slowdown could be postponed to the second quarter of this year.

He's not alone in noting that any pick-up in first-quarter growth might not be sustained.

"We have revised our estimate of GDP growth in the first quarter to 0.3% quarter on quarter," Jack Allen, senior Europe economist at Capital Economics, said in note earlier this month.

"We would not get too carried away by the strong construction numbers given that the sector accounts for only 5% of GDP and that the first-quarter performance was at least partly due to favorable weather effects. And April's weak flash Composite PMI suggests that the economy may well slow again in the second quarter."