Germany, France propel euro zone growth above forecasts

BRUSSELSBERLIN, May 14 (Reuters): Powerful performances by the German and French economies propelled growth in the euro zone well above forecasts in the first quarter while also highlighting the yawning gap between the bloc's strong and weak. The 17-nation currency area expanded by 0.8 per cent in the first three months of the year, data showed Friday, fuelled by startling 1.5 per cent GDP growth in Germany, while the French economy grew 1 per cent, driven in part by consumer demand. Economists had forecast euro zone growth of 0.6 per cent. Analysts said the better than expected data - despite Portugal returning to recession and Greece still buried under a debt mountain - strengthened the case for a European Central Bank rate rise by July, which would be the second this year. Germany and France account for nearly half the region's gross domestic product. Both nations bounced back from a modest showing in the last quarter of 2010 when bad weather hit output. The euro got a lift from the German numbers and jumped further to touch $1.4330 briefly on the release of the euro zone number. "This is almost certainly as good as it gets for the euro zone and growth seems likely to moderate over the coming months," said Howard Archer, economist at IHS Global Insight. The European Commission forecast quarter-on-quarter growth in the euro zone would slow to 0.3 per cent in the second quarter and then stabilise at 0.4 per cent for the next two quarters. "Nevertheless, there now looks a very decent chance that euro zone GDP growth will reach 2 per cent in 2011 for the first time since 2007," Archer said. The European Commission was less optimistic, sticking to its February projection of 1.6 per cent growth this year with inflation well above the ECB's two per cent target. In 2012, it expects euro zone growth of 1.8 per cent. By contrast in Germany, a top economic adviser to the government, Wolfgang Franz, told TV channel ARD the country's economy could expand by 3 per cent or more this year. The Commission expects German growth of 2.6 per cent this year. Analysts were a little more downbeat about France, saying this was probably its high water mark. "The recent surge in oil prices is likely to erode household purchasing power, while also eating into company profits, leaving its mark on consumption and investment. Furthermore, we expect fiscal retrenchment to increasingly come to the fore," said Joost Beaumont, an economist at ABN-AMRO. Italy bucked the trend, growing by just 0.1 per cent in the first quarter, posting the same weak rate as the last three months of 2010. The government predicts growth of 1.1 per cent this year and the Commission only 1.0 per cent. For the euro zone's most debt-ridden economies, solid growth is a distant dream. Portugal's economy shrank 0.7 per cent in the first quarter, sending the economy back into recession. Its government has admitted that, having sought a bailout, its economy will shrink both this year and next. The Commission expects 2.2 per cent contraction in 2011 and 1.8 per cent in 2012. Greece actually achieved quarterly growth - of 0.8 per cent - for the first time since late 2009 but that followed a vicious 2.8 per cent contraction in the last quarter of 2010. The Commission expects Athens to announce new austerity measures this year to meet its bailout targets.