The euro zone is witnessing a remarkable surge in economic growth during the first quarter of 2024, recording its fastest pace in two years and dispelling fears of “stagflation” looming in the region.
Output within the single currency area expanded by 0.3 percent in the first three months of the year, a significant improvement compared to the stagnant growth recorded in the previous quarter. This growth rate, the strongest since the Ukraine crisis in 2022, exceeded the expectations of economists, who expected a more modest growth of 0.1 percent.
Data from Eurostat, the European Union's statistical office, reveals that annual consumer price inflation remained steady at 2.4 percent in April, matching March numbers and in line with expectations. This stability in inflation, the lowest since July 2021, provides further reassurance amid economic fluctuations.
Melanie Debono, chief European economist at Pantheon Macroeconomics, points to the surprising strength of the recovery, signaling a move away from the shallow recession seen at the end of the previous year.
The positive momentum in the first quarter indicates a turnaround in the euro area, especially in the wake of turmoil in major economies such as Germany due to energy and industrial challenges in the wake of the Russian incursion into Ukraine, coupled with inflation rising above 10 percent. These developments precede the upcoming EU elections in June, which will be the first vote since Brexit.
Among the top performers, the Republic of Ireland stands out as the fastest growing economy within the bloc, achieving notable growth of 1.1 per cent. However, factors such as measurement inconsistencies and volatility caused by foreign direct investment from US tech giants headquartered in the country contribute to Ireland's unique economic landscape. Other notable performers include Lithuania, Latvia, Spain and Portugal, each of which recorded strong growth rates.
Core inflation, excluding volatile food and energy prices, fell marginally from 2.9 percent to 2.7 percent, while services inflation fell from 4 percent to 3.7 percent in April compared to the same period last year.
The encouraging economic data provides a respite to policymakers at the European Central Bank, who are deliberating on interest rate adjustments following the region's exposure to recession amid rising borrowing costs. With the next ECB decision on June 6, financial markets expect a 60% probability of monetary policy easing, which would represent the first such move since 2020. However, a growing economy and record-low unemployment levels may pose new inflationary challenges.
Amid global economic dynamics, China is also seeing a positive rebound in manufacturing activity, with April seeing the fastest expansion in 14 months, driven by a surge in new export orders. Although this indicates progress in China's recovery, challenges remain in domestic demand and the real estate sector.
Despite China's strong first-quarter GDP growth of 5.3%, beating analysts' expectations, March indicators point to continued weakness in industrial profits, retail sales, and real estate transactions, which could set back the country's ambitious growth target by about 5 percent. % for the year 2024.