Economy Grows More than Expected Despite Inflation Fears

The 15-member euro zone economy grew by 0.8 percent quarter-on-quarter during the first three months of the year, the European Union's statistics office said, with rising investment and inventories resulting in an annual 2.2-percent growth rate in the first quarter.

This added to signs that the economy built around the euro has so far managed to withstand the fallout from the world financial market and credit crisis.

Despite the strong euro, euro zone exports rose 1.9 percent during the first quarter, with investments growing by 1.6 percent. However, private consumption edged up only a marginal 0.2 percent, the statistics office said.

The euro zone grew by 2.6 percent last year. Economists had expected the data would show the Euro zone economy growing by 0.7 percent during the first quarter.

Growth could be short-lived

However, economists expect the ripples from the financial crisis unleashed by the US mortgage market crisis and growing inflation fears to result in euro zone growth slipping back a gear as the year unfolds.

Indeed, the release of the latest growth figures was accompanied by further evidence of a pickup in inflation with industrial producer prices in the euro zone bounding ahead by an annual 6.1 percent in April.

This came in the wake of a 2.0-percent monthly jump in energy costs, which resulted in a 14.3-percent leap year-on-year. Euro zone factory-gate prices grew by an annual 5.8 percent in March.

The release of the latest data also came ahead of Thursday's European Central Bank meeting with analysts expecting ECB chief Jean-Claude Trichet to talk tough at his regular press conference about the threat posed by renewed inflationary pressures.

Euro zone inflation hit a 16-year high of 3.6 percent in May, the EU statistics office said last week.

ECB not likely to cut interest rates

As a result, this is again likely to rule out any early moves by the hawkish ECB to follow the world's other leading central banks and trim the cost of money to help spur economic growth.

While Tuesday's data showed industrial producer prices creeping up month on month in April by 0.8 percent, the solid first-quarter growth rate will help the ECB to argue that euro zone growth remains on a sound footing.

Also driving euro zone growth during the first three months of the year was a perky 2.6-percent annual growth rate in Germany, Europe's biggest economy.

The broader based 27-member EU also recorded a 0.8-percent first quarter growth rate with a strong economic performance by the EU's new member states in Central and Eastern Europe helping to underpin the Brussels-based bloc's economic expansion.

Tuesday's figures showed Poland growing at 6.4 percent during the first quarter with both Romania and Slovakia reporting expansion rates of at least 8.0 percent in the first three months of the year.

This resulted in an annual 2.5-percent EU growth rate during the first quarter.

Earlier this week the International Monetary Fund revised up its 2008 euro zone growth forecast to 1.75 percent from a previous estimate of 1.4 percent.