Eurozone warms up to recovery

Paris shoppers: Consumer spending has helped France's economic recovery

LONDON, England (CNN) -- If there were any doubts remaining about the direction of Europe's economy, the past week has provided ample evidence that it is definitely on the road to recovery.

One after one, the eurozone's main workhorses have signalled a return to economic growth and a resurgence in business confidence after suffering the effects of a prolonged global slowdown.

"The eurozone economy has turned the corner on the downturn and is now beating the drum for faster growth ahead," Bear Stearns said in a note to investors this week.

In Germany, Europe's biggest economy has begun expanding for the first time in more than six months, after briefly slipping into recession.

The Federal Statistics Office said Germany's gross domestic product grew by 0.2 percent in the first quarter after contracting by 0.3 percent at the end of 2001. Economists are forecasting GDP growth of 1 percent for all of this year and 2.6 percent in 2003.

In France, the eurozone's second largest economy, GDP rose by 0.4 percent in the first quarter, after a decline of 0.4 percent in the fourth quarter of 2001. The economy is expected to expand by as much as 1.7 percent in 2002 and by about 3 percent next year.

Consumer spending has remained strong in France, rising 0.8 percent in April from a year early -- beating expectations for flat growth last month.

In Italy, economic growth is running at similar pace as in German, with GDP rising by 0.2 percent in the first quarter of this year. Business confidence is also growing, hitting a 15-month high in May.

In each case, the renewed economic growth has been spurred by rising factory orders and increased production. It has also been bolstered by a recovery in the United States, the destination for most eurozone's exports.

Rate rise expected

And on Friday, the U.S. reported that its economy grew by a revised annual rate of 5.6 percent in the first quarter of the year -- lower than many had expected but still a long way from the recession that plagued the world's biggest economy last year.

All this is expected to prompt the European Central Bank to reconsider its monetary policy and begin raising interest rates in the coming months.

Like other major central banks, the ECB lowered rates in 2001 to encourage more spending by consumers and companies in an effort to ease the impact of the global economic slowdown.

With that goal accomplished, and recovery now an tangible goal, the ECB will again be looking to control economic growth and ward off inflationary pressure. That means keeping eurozone growth to between 2 and 2.5 percent this year.

"The most probable scenario is that we return to an economic growth rate close to [that] potential,'' Christian Noye, the ECB's outgoing vice-president, told the Italian newspaper Il Sole 24 Ore on Friday.

"If necessary the ECB is ready to act to be sure that inflation falls below 2.0 percent,'' he said. "We absolutely do not want to give the impression that we are complacent regarding inflation.''

But economic weakness still remains. Even though some countries, like France, are seeing a rise in consumer confidence, others say people are holding back from spending too much, too soon.

"Weak consumer confidence has remained the bane of recovery prospects so far in the Eurozone as labour market demand has suffered and unemployment continued to rise," said Bear Stearns.