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May 13, 2015 6:42 AM

Eurozone growth outstrips US despite fresh Greek recession

The Associated Press

LONDON (AP) The eurozone economy is growing faster than the U.S. and at its highest tick in nearly two years despite a disappointing slowdown in Germany and recession's return in Greece.

The economy of the 19 countries that use the euro grew by a quarterly rate of 0.4 percent in the first three months ahead, Eurostat, the European Union's statistical agency, said Wednesday. That was up from the 0.3 percent recorded in the previous three-month period and was in line with most expectations in the financial markets.

Growth hasn't been this strong since the second quarter of 2013, when it also stood at 0.4 percent in the wake of the region's longest-ever recession.

The eurozone also grew far faster than the U.S., which saw output expand at a paltry quarterly rate of 0.1 percent largely because of bad weather on an annualized basis, which is a more common way of measuring growth in the U.S., the eurozone grew at around 1.6 percent against the U.S.'s 0.2 percent.

Other plus points include the 0.3 percent growth recorded in Italy its first expansion since the third quarter of 2013 and a surprise 0.6 percent rebound in France, the eurozone's second-largest economy. Perhaps the most notable increase was in Spain, which saw output expand by a robust 0.9 percent, confirming its current status as the poster child of economic reform in the region.

The bloc has enjoyed tail winds such as a fall in oil prices, which acts like a tax cut for businesses and consumers, and the export-boosting drop in the value of the euro. To cap it all off, the European Central Bank launched its long-awaited 1.1 trillion-euro ($1.2 trillion) monetary stimulus to keep a lid on interest rates in the markets, while budgetary policies across the eurozone are not as stringent as they were just a year ago.

The increase is a relief for a region that's spent the past few years firefighting crises. Still, some expected growth to be even stronger due to the favorable conditions. And with the global economy faltering and Greece on the brink of default again, there are worries in the markets that this may be as good as it gets for a while.

"We do not interpret the good start into the year 2015 as the beginning of a sustainable upturn," said Christophe Weil, an economist at Commerzbank. "The economic framework is unlikely to remain as favorable."

The overall first-quarter growth figure masks some disappointments, including unexpectedly low growth in Germany, Europe's largest economy. It saw its quarterly growth rate decline to 0.3 percent from 0.7 percent. The rate was dragged down mainly by a rise in imports, which may not be such a bad thing as it points to a rising appetite to spend among German businesses and consumers.

Greece, which is in the midst of protracted bailout talks with creditors that many in the markets think could see it leaving the euro this year, also saw its economy shrink by 0.2 percent in the first three months. Following the 0.4 percent contraction in the last quarter of 2014, Greece is now technically back in recession barely a year after it emerged from a downturn as severe as the Great Depression. Uncertainty tends to stifle investment and spending.

The biggest headache, according to most economists, is Greece. The country's new left-wing government's pledge to end the austerity demanded by international creditors has seen its talks to get more bailout loans from creditors drag on for more than three months.

The Greek government is trying to come up with a series of economic and budget reforms that will convince its creditors from the eurozone and International Monetary Fund to pay out 7.2 billion euros ($8 billion) of bailout cash. With every passing day, the uncertainty has sharpened, to the detriment of the Greek economy.

If the bailout talks fail, the country could default on its debts, have to put limits on the free flow of money and eventually even exit the euro. Most economists think that would cause a massive recession in Greece for at least a year as the country tries to adjust to a new, weaker currency.

And though the eurozone has shored up its defenses against such a worst-case scenario, a Greek exit would stoke jitters in the markets about which country could be headed for the door next. The repercussions of a so-called Grexit could be far and wide a big hit to confidence that could limit investment and consumer spending.

"The biggest downside risk in coming months comes from the risk of a Greek disorderly default and exit from the eurozone," said Kamil Kovar, economist at Moody's Analytics.


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