The EU grew faster than expected in Q1, accelerating to 0.7% vs. 0.5% consensus (and 0.4% in February). Growth was led by a robust performance from Germany, which grew at 1.5% (vs. 0.75% consensus). The acceleration, though modest, should temporarily put fears of stagflation to rest, and give Jean-Claude Trichet and the ECB a freer hand to tackle inflation. It will also likely dampen hopes for a dollar rally. Bloomberg:
Sustained growth for now justifies the European Central Bank’s decision to hold off cutting interest rates as it tries to conquer inflation, which remained above the ECB’s ceiling for an eighth month in April. The bank may still soon face a quandary as evidence mounts that the expansion is weakening, even in Germany.
“It appears that the euro zone is still resisting the U.S. slowdown and the ongoing financial turmoil,” said Oscar Bernal, an economist at ING Groep in Brussels. “However, a slowdown in economic activity is likely to be in evidence over coming months.”