Euroarea economic growth accelerates in Q1 2016 on domestic demand

In seasonally adjusted terms, the Eurozone’s economic growth quickened to 0.5% q/q in Q1 2016, according to Eurostat’s flash estimate. Compared with the first quarter of 2015, euro area’s economy grew 1.5% sa.

Germany contributed the most to the euro area’s economic growth. The country recorded the highest quarterly growth in two years in Q1 2016, growing 0.7%. Domestic demand, particularly construction, mainly drove the economic growth. One-off factors such as mild winter mainly helped in the positive development. Thus the high growth figure cannot be extrapolated to the upcoming quarters.

The economic growth was broad-based throughout the currency bloc. France and Spain had already released their Q1 GDP estimates during the end of April. The economy grew 0.5% and 0.8% respectively in the first quarter. Moreover, Italy also registered a sound pace of growth of 0.3%. Economies of Finland and Netherlands expanded 0.4% and 0.5% respectively in Q1 2016.

The monthly indicators and preliminary numbers show that domestic demand mainly drove the euro area economic growth in the first quarter. This indicates positive conditions for private consumption and subdued development in global trade and therefore exports of the currency bloc.

The Euroarea’s Q1 GDP flash estimate came in slightly stronger than anticipated in most of the macroeconomic projections released in 2016. The economic growth also surpassed the European Central Bank’s March macroeconomic projections. But the stronger growth is partially because of one-off factors and does not suggest improved growth outlook for the currency bloc, said Nordea Bank in a research report.

The medium term inflation forecast continues to be the priority for the ECB. Above-expected growth figure should lead to higher inflation forecast after a lag under normal circumstances. But there is quite an uncertainty regarding price formation and current wage in the Eurozone. There is uncertainty regarding the estimates about labor market slack and also the current structural changes in the labor market. Hence the high growth rate is unlikely to have an effect on the central bank’s inflation forecast, added Nordea Bank.