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The economies of France and Spain grew faster than expected in the first quarter as domestic consumption and investment rebounded, paving the way for the eurozone as a whole to tentatively emerge from its recent slump.
France's gross domestic product (GDP) grew by 0.2% in the first three months of the year, official figures released on Tuesday showed. This was above forecasts by economists polled by Reuters, which had expected the economy to expand by 0.1%, the same as in the final quarter of last year.
Spain's economy also grew by 0.7% in the first quarter, exceeding expectations, due to increased domestic and foreign demand. This growth has recently cemented Spain's position as one of Europe's most performing countries. Economists had expected production to rise 0.4%.
The recovery in economic activity comes as the recent decline in inflation rates in some of the euro area's major member states has stalled. France reported on Tuesday that consumer price inflation rose above expectations by 2.4% in April, following Spain's similarly better-than-expected inflation of 3.4% and Germany's 2.4%.
The euro rose 0.1% against the dollar to $1.070 after the economic data was released, extending recent gains ahead of this week's Federal Reserve interest rate meeting.
Growth in the euro zone is expected to accelerate moderately this year as slower inflation and higher wages increase household purchasing power. Data released later on Tuesday is expected to show the region's GDP expanded by 0.1% in the first quarter, after being flat in the final quarter of last year.
Banks' recent reduction in borrowing costs in anticipation of the European Central Bank starting to cut interest rates this summer is also supporting domestic consumption.
Separate data released on Tuesday showed consumer spending rose sharply in France and Germany at the end of the first quarter. Retail sales in France rose 0.4% in March, while they rose 1.8% in Germany, rebounding from a 1.9% decline in February and achieving the strongest monthly growth in almost a year.
But analysts are concerned that efforts to reduce France's persistently high budget deficit could weigh on the economy later this year. Klaus Vistesen of Pantheon Macroeconomics warned that consumer spending would slow down as “the threat of tax hikes to curb the budget deficit will dampen household sentiment and purchasing intent.”
Household spending in the eurozone's second-largest economy accelerated in the first quarter, expanding by 0.4%, while investment also rebounded, rising 0.3%, Statistics France said. Government spending increased by 0.6%. The change in inventories reduced France's GDP by 0.2 percentage points, but had no effect on trade.
Spain's strong growth in the first quarter was due to a combination of domestic demand, which contributed 0.2 percentage points to growth, and external demand, which increased by 0.5 percentage points. Investment in the eurozone's fourth-largest economy rose 1.3%, but government spending fell 1%. Exports increased by 2.4%, and imports increased by 1.1%.
Additional reporting by Philip Stafford in London
