Germany Blames Trade as European Economies Suffer Growth Setback

(Bloomberg) -- Economic growth slowed across Europe at the start of the year, with Germany seeing its pace of expansion cut in half amid weaker trade.

The 0.3 percent increase in Europe’s largest economy was softer than forecast and the weakest in more than a year. Dutch and Portuguese growth also cooled more than expected in the first quarter, while a similar trend was seen across central and eastern Europe.

A deceleration in euro-area momentum to 0.4 percent was confirmed, while investors’ expectations for the outlook remained close to the lowest since 2016. That raises the question for the European Central Bank whether this is merely a soft patch or indicative of something more alarming.

So far, officials have largely dismissed the sluggish start to the year -- blaming factors such as colder weather -- and expressed confidence that weakness will dissipate. Speaking on Monday, ECB Governing Council member Francois Villeroy de Galhau argued that euro-area growth remains solid and broad-based and that policy makers were still likely to halt asset purchases this year.

The European Commission has also downplayed concerns and this month maintained its forecast that full-year growth will almost match the decade-high pace hit in 2017. Still, there are threats, including rising trade protectionism and a stronger euro that could act as dampers on the expansion in Germany and the euro zone.

Germany’s statistics office said first-quarter growth was bolstered by a pickup in equipment investment and construction and a slight increase in private consumption. Government spending declined for the first time in almost five years, with exports and imports also down.

The Economy Ministry said on Tuesday that the upturn “remains intact.” Just last week, Siemens AG raised its outlook for full-year earnings, and HeidelbergCement AG said the economic upswing will boost construction activity in its major markets after a long winter held back first-quarter results.

While shrugging off the recent weakness, the ECB said last month that global risks have become “more prominent.” The ZEW institute said Tuesday that trade concerns, the U.S. withdrawal from the Iran nuclear deal and higher oil prices are having a “negative impact” on the outlook.

“The international environment remains fairly good unless Trump totally spoils it, the domestic environment is very good,” said Holger Schmieding at Berenberg Bank in London. “The German economic outlook looks good despite a dent now.”

In news that might please European central bankers in their long battle to revive inflation, French wage growth accelerated in the first quarter to 0.7 percent. While the quarter is often stronger than the rest of the year, that’s still the biggest increase since 2013.

Industrial production in the euro area rose 0.5 percent in March, rebounding after three consecutive monthly declines, according to a Eurostat report. The economy grew an annual 2.5 percent in the first quarter.

--With assistance from Kristian Siedenburg Harumi Ichikura and Zoe Schneeweiss

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien, Jana Randow

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