Shoppers bolster eurozone growth on back of falling energy prices

A spending spree triggered by the plunge in energy prices helped boost eurozone growth to 0.4 per cent in the first quarter, as the region made further strides towards a meaningful recovery after years of near stagnation.

The strong start to 2015 means the eurozone grew at a faster pace than the US and UK economies, reversing the trend seen in recent years when the region was one of the world's economic laggards.

The flash estimate for gross domestic product, produced by Eurostat, was broadly in line with economists' expectations and beat the 0.3 per cent expansion recorded for the final quarter of last year. The US and UK economies expanded by 0.2 per cent and 0.3 per cent respectively during the same period.

A sturdier performance from the French and Italian economies boosted the single currency area and fuelled hopes that confidence is finally strengthening in weaker parts of the region, although Greece fell back into recession.

France's economy smashed expectations, expanding at the fastest pace in nearly two years as falling prices helped consumer spending lift growth by 0.6 per cent, a sharp rise from stagnation in the fourth quarter. Italy's 0.3 per cent expansion also beat forecasts and was the fastest in four years, bidding farewell to nearly three years of stagnation and recession.

But the mood was more sombre in Germany, where growth dipped to 0.3 per cent from 0.7 per cent, missing consensus estimates.

The German slowdown raised doubts about the recent wave of optimism over Europe's largest economy, which has seen Berlin raise its 2015 forecast to 1.8 per cent and private economists target growth of 2 per cent and higher.

"The weaker than expected rise supports our warnings that many economists have become over-optimistic," said Jorg Kramer, chief economist at Commerzbank. "Forecasts in excess of 2 per cent now look too high. We even see downward risks to our conservative 1.8 per cent estimate."

The eurozone's reliance on low oil prices for growth sparked broader concern about the viability of the still-nascent recovery. Signs of slowing growth in important markets such as the US and China have weighed on exports, lessening the favourable impact of the weaker euro on trade.

"If oil prices and the euro strengthen, then we are in for some weakness. The eurozone's recovery is not yet strong enough to sustain itself," said Michael Heise, chief economist at Allianz.

But even if the oil price rises, other inflationary pressures are set to remain weak throughout 2015. That, along with steep wage rises in stronger economies such as Germany's, has meant most economists remain optimistic consumers will continue to spend.

"Headline inflation won't move materially higher for another year or so. And by then investment should be kicking in," said Erik Nielsen, chief economist at UniCredit.

Meanwhile, Greece's economy shrank by 0.2 per cent in the first quarter, following a 0.4 per cent contraction in the fourth quarter.

A contraction was expected on the back of mounting concern that Greece was heading for a default on its debt to its international creditors and possibly an exit from the euro.

Italy was seen as among the biggest beneficiaries of the slide in oil prices, the weaker euro and more aggressive monetary easing by the European Central Bank. But Pier Carlo Padoan, Italy's finance minister, last month warned these favourable conditions would not last forever, and that the country had to "exploit this window of opportunity."

With additional reporting by Anne-Sylvaine Chassany in Paris, Stefan Wagstyl in Berlin, James Politi in Rome, Kerin Hope in Athens and Michael Hunter in London

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