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Eurozone’s First-Quarter Growth Offers Respite from ‘Stagflation’ Concerns

The eurozone experiences a notable surge in economic growth during the first quarter of 2024, marking its fastest pace in two years and dispelling concerns of ‘stagflation’ looming over the region.

Output within the single currency area expanded by 0.3 per cent in the initial three months of the year, a significant improvement from the stagnant growth recorded in the previous quarter. This growth rate, the strongest since the 2022 Ukraine crisis, surpassed economists’ expectations, who had anticipated a more modest 0.1 per cent growth.

Data from Eurostat, the statistical office of the European Union, reveals that annual consumer price inflation remained steady at 2.4 per cent in April, matching March’s figures and aligning with forecasts. This stability in inflation, the lowest since July 2021, provides further reassurance amidst economic fluctuations.

Melanie Debono, senior Europe economist at Pantheon Macroeconomics, notes the surprising strength of the rebound, suggesting a departure from the shallow recession experienced at the close of the previous year.

The positive momentum in the first quarter signals a turnaround for the eurozone, particularly following disruptions in major economies like Germany due to energy and industrial challenges following Russia’s incursion into Ukraine, coupled with inflation surging beyond 10 per cent. These developments precede the European Union’s upcoming June elections, marking the first vote since Britain’s departure.

Among the standout performers, the Republic of Ireland emerges as the fastest-growing economy within the bloc, with a remarkable 1.1 per cent growth. However, factors such as measurement discrepancies and the volatility induced by foreign direct investment from American technology giants headquartered in the country contribute to Ireland’s unique economic landscape. Other notable performers include Lithuania, Latvia, Spain, and Portugal, each recording robust growth rates.

Core inflation, excluding volatile food and energy prices, marginally dipped from 2.9 per cent to 2.7 per cent, while services inflation eased from 4 per cent to 3.7 per cent in April compared to the same period last year.

The encouraging economic data provides a respite for policymakers at the European Central Bank (ECB), who are deliberating on interest rate adjustments following the region’s brush with recession amid heightened borrowing costs. With the ECB’s next decision due on June 6, financial markets anticipate a 60 per cent likelihood of monetary policy loosening, marking the first such move since 2020. However, a growing economy and record-low unemployment levels may pose fresh inflationary challenges.

Amidst global economic dynamics, China also sees a positive upturn in manufacturing activity, with April witnessing the fastest expansion in 14 months, driven by increased new export orders. While this signals progress for China’s recovery, challenges persist in domestic demand and the property sector.

Despite China’s robust first-quarter GDP growth of 5.3 per cent, surpassing analyst forecasts, indicators for March suggest ongoing weaknesses in industrial profits, retail sales, and property transactions, potentially hindering the country’s ambitious growth target of around 5 per cent for 2024.

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Eurozone’s First-Quarter Growth Offers Respite from ‘Stagflation’ Concerns