French and Spanish economies grow faster than expected in first quarter

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The French and Spanish economies grew faster than forecast in the first quarter on a rebound in domestic consumption and investment, setting the stage for the wider eurozone to tentatively emerge from its recent stagnation.

French gross domestic product expanded 0.2 per cent in the first three months of the year, according to official figures released on Tuesday. This exceeded the forecasts of economists polled by Reuters, who had expected expansion of 0.1 per cent like the final quarter of last year.

Spain’s economy also outstripped forecasts by expanding 0.7 per cent in the first quarter thanks to rising domestic and external demand. The growth cemented Spain’s place as one of Europe’s strongest recent performers. Economists had expected a rise in output of 0.4 per cent.

The rebound in activity came as inflation’s recent decline stalled in several of the eurozone’s larger members. France on Tuesday reported higher consumer price growth than expected of 2.4 per cent in April, following similarly above-forecast inflation figures of 3.4 per cent for Spain and 2.4 per cent for Germany.

The euro rose 0.1 per cent against the dollar to $1.070 after the release of the economic data, extending its recent rally ahead of the US Federal Reserve meeting on interest rates this week.

Eurozone growth is expected to pick up modestly this year as inflation slows and wages rise, boosting household spending power. Data to be released later on Tuesday is expected to show the bloc’s GDP expanded 0.1 per cent in the first quarter after flatlining in the final quarter of last year.

Domestic consumption is also being supported by recent reductions in borrowing costs by banks in anticipation that the European Central Bank will start cutting interest rates this summer.

Consumer spending rose sharply in France and Germany at the end of the first quarter, according to separate data released on Tuesday. French retail sales increased 0.4 per cent in March, while in Germany they were up 1.8 per cent, rebounding from a 1.9 per cent decline in February to achieve the strongest monthly growth for almost a year.

However, analysts worry that France’s efforts to reduce its stubbornly high budget deficit could weigh on the economy later this year. Claus Vistesen at Pantheon Macroeconomics warned that consumer spending would slow “as household sentiment and purchasing intentions are curbed by threat of a tax increase to rein in the budget deficit”.

The French statistics office said household spending accelerated in the eurozone’s second-largest economy to expand 0.4 per cent in the first quarter, while investment rebounded to rise 0.3 per cent. Government spending rose 0.6 per cent per cent. Changes to inventories knocked 0.2 percentage points off French GDP, while trade had zero impact.

Spain’s strong first-quarter expansion was down to a combination of domestic demand, which contributed 0.2 percentage points to growth, and external demand, which added 0.5 percentage points. Investment in the eurozone’s fourth-largest economy increased 1.3 per cent, but government spending fell 1 per cent. Exports were up 2.4 per cent, while imports rose 1.1 per cent.

Additional reporting by Philip Stafford in London