Spain and Italy fuel recovery but analysts say that boost will only be short-term

This article is more than 1 year old

This article is more than 1 year old

A rapidly expanding Spanish economy and a turnaround in recession-hit Italy increased the eurozone’s growth rate to 0.4% in the first three months of the year, according to official estimates.

The 19-member currency bloc doubled the rate of expansion from the last three months of 2018, when GDP growth slowed to just 0.2% and the European Central Bank was forced to backpedal on plans to increase borrowing costs.

The surprise boost cheered markets across the continent, but failed to dispel concerns that the major economies in Europe would struggle to grow this year amid political uncertainty and a manufacturing slowdown.

Jack Allen, an economist at Capital Economics, said: “The continued weakening of the timelier survey indicators suggests that the pick-up in eurozone GDP growth will not be sustained. We still think that the economy will grow more slowly in the second quarter and expand by less than most forecasters expect in 2019 as a whole.”

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Rising oil prices are also expected to apply a brake on growth after rising from $50 (£38) in January to $74 for a barrel of Brent crude earlier this month. The price increased on Tuesday by 1% to $73 a barrel before falling back slightly as oil’s price recovered from a brief side last week.

The increased likelihood of Libya’s oil output reducing after a prolonged coup attempt and the US president Donald Trump’s determination to curtail Iranian oil supplies have heightened concerns of oil shortages in global markets.

Meanwhile, trade talks between the US and China resumed in Beijing, adding to concerns that the world’s largest and second largest economies could step up a tariff war that has already hit global trade.

Trump has threatened to slap tariffs on $11bn of European goods in response to subsidies for Airbus, the European aerospace and defence group, which he argues are harmful to the US.

While these threats weigh on the minds of European investors, improving unemployment and business spending have lifted sentiment after a slowdown during 2018.

Growth in Spain, the region’s fourth largest economy, rose to 0.7%. The Italian economy expanded by 0.2% in the three months to March, escaping from two quarters of recession, the Istat agency said.

Italy’s 10-year bond yield, which is a proxy for its borrowing costs, fell to 2.56%, down from 3.6% last November.

The data is likely bring some relief to Italy’s coalition government, which is struggling to hit ambitious growth targets agreed with Brussels to limit a growing budget deficit and maintain government spending.

“The bottom line is that we should cheer today’s quite decent growth numbers, although we should not be carried away. It is still early days,” said Marco Valli of Unicredit in Milan.

Analysts said Germany, which publishes its GDP figures in two weeks, is likely to stage a recovery after a slowdown that almost brought Europe’s largest economy to stall speed last year.

“By and large, the necessary conditions for an industrial turnaround later this year are falling into place,” said Florian Hense of Berenberg bank.

“Over the past few weeks, US-China trade tensions have eased, news from China has suggested the Chinese stimulus may have started to work and the risk of an immediate hard Brexit has receded,” he said.

A first estimate of the UK’s GDP growth rate in the first quarter will be published next week.