Euroland GDP Results

Provisional GDP numbers for eurozone countries in the first quarter are out today. The German economy surprisingly bounces back, whilst Italy is now officially in recession after two quarters of contraction. Also worthy of note is that the Dutch economy contracted slightly in the first quarter, which may have some implications for the forthcoming constitution referendum there.

The situation in Germany continues to be to cause concern since whilst Germany saw its strongest quarterly growth for four years, expanding by an unexpectedly-strong 1.0 per cent (or at an annual rate of 4%)the figure marked a rebound after a shallow, technical recession in the second half of last year. In particular the federal statistics office said that the improvement “was exclusively based on exports”.


The Italian problem, howevere, is becoming genuinely worrying.

"The unexpected fall in Italian gross domestic product will lead to fresh worries about the outlook for the eurozone economy, hit by higher oil prices and the euro's appreciation late last year. It is also a serious challenge to Italian prime minister Silvio Berlusconi's chances of winning re-election in Italy's next national elections, due by May 2006.

As member of the eurozone Italy cannot cut interest rates or devalue its currency as it has in previous significant downswings. The depth of the Italian recession “is a whole new ball game, we don't have any precedent for dealing with this,” said Julian Callow, economist at Barclays Capital."
Source: Financial Times

The FT Deutschland is reporting that pressure on the European Central Bank to consider an interest rate cut is expected to come next week from the OECD.

According to FT Deutschland a draft OECD report says ECB interest rates should be kept on hold while the indicators remain mixed, but if the ECB's economic assessment moves clearly in either direction, monetary policy should react. The OECD has also revised down its forecasts for growth this year to 1 per cent in Germany and 1.6 per cent in the eurozone, compared with the 1.4 per cent and 1.9 per cent forecast in November.

In other words if the downside risks continue, arguments for cutting the rate will mount up. This will be a real first for the ECB, and the first major test of the euro, since monetary policy has been, to date, relatively uncontroversial. Keep watching this space.