Germany posted strong growth in the first quarter of the year and the contrast with France could not have been starker: the eurozone’s second largest economy failed to expand at all.
German quarterly growth of 0.8 per cent marginally exceeded forecasts and was double the pace at the end of 2013. France was expected to pale in comparison but had still been forecast to expand by 0.2 per cent.
Inventory changes and public spending were the only factors which kept the French economy from contracting while Germany’s performance was driven largely by domestic demand.The figure for the eurozone as a whole showed growth of 0.4 per cent on the quarter.
France will now need 0.5 per cent growth each quarter to meet a government forecast for subdued 1 per cent growth in 2014, Natixis Asset Management chief economist Philippe Waechter estimated.
Berlin has said it expects domestic demand to drive growth of 1.8 per cent this year.
“Positive impulses came exclusively from within the country,” the German Statistics Office said in a statement.
“By contrast, foreign trade put the brakes on economic growth.”
To compound France’s problems a public sector strike has been called by the hardline FO labour union over civil service pay freezes – a reminder of the difficulties of enacting economic reform. The silver lining is the absence of pressure from the markets with borrowing costs for many eurozone countries at record lows. France will auction up to €9.5 billion of bonds later.
With recovery from years of economic crisis slow to materialise and prices barely rising – eurozone inflation was just 0.7 per cent in April – the European Central Bank appears to be preparing to loosen policy in June.
A number of sources told Reuters that the ECB was working on a package of options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.
The ECB has flagged a strong euro as one of its concerns, given the downward pressure it puts on import prices and exports.
President Francois Hollande’s government wants eurozone governments to take action on the currency and has called for negotiations to weaken it after EU parliament elections next week.
The head of France’s Medef national employers association said on Tuesday that Paris should not use its call for a weaker euro as a substitute for much-needed reforms.
Other eurozone countries which have taken strong medicine to improve competitiveness are starting to see the benefits.
Spain reported first quarter GDP growth of 0.4 per cent two weeks ago, giving a year-on-year expansion of 0.6 per cent, the strongest in three years.
Other high debtors such as Portugal and Italy are forecast to post some growth when they report later.