First-quarter GDP growth reached 0.7%, exceeding forecasts and keeping the annual rate flat at 2.2%. Chalk it up to Germany, which accounts for about a third of the eurozone. Its quarterly growth rate hit a 12-year high of 1.5% in the first three months of this year, shrugging off the strong euro, high oil prices and global financial turmoil. It was helped by a rise in investment and consumer spending, the latter marking a recovery from a sharp fall in the autumn.

Growth is heading down…

Nonetheless, this seems likely to prove a “high-water mark” for the euro area, said The Economist. Germany’s GDP figure was boosted by abnormally strong construction activity, due to mild weather. This fillip could easily knock 0.4% off growth next quarter as it unwinds, said Capital Economics.

More importantly, reliable surveys, including the purchasing managers’ index – the PMI gauging manufacturing activity hit a three-year low in April – point to much slower growth this quarter; eurozone industrial production growth has shrunk to 2%, with March’s fall in capital goods production a “sign that the strong euro and weakening global demand may be starting to take their toll”. Even German firms are now feeling the pinch from the strong euro – shipments fell in February and March, said The Economist.

Consumption is a further worry. The zone’s retail sales declined for a fourth time in six months in March and are 1.6% down on last year. Given worries about inflation and real income growth having slid over the past four years, it’s hard to be confident that German consumption is set for a significant boost, despite recent falls in unemployment and high consumer savings. That’s a pity, since shoppers in another heavyweight economy, Spain, are all spent out now that their housing bubble has collapsed. Quarterly growth is at a 13-year low. The debt deleveraging process in Spain and Ireland “has barely started”, said Julian Callow of Barclays Capital. Italy, meanwhile, appears in danger of slipping into recession.

…as the credit crunch tightens

And the credit squeeze is worsening. The latest ECB survey covering the first quarter shows that 49% of lenders tightened standards for corporate loans, up from 41% in the previous survey. This is significant, said Liam Halligan in The Sunday Telegraph, because 85% of eurozone finance is made up of bank credit, compared to under half in America. So the first quarter may have looked good, but the data is set to look a lot “less flattering”, as ECB president Jean-ClaudeTrichet put it, from now on.

Source: A High Water Mark for The Eurozone