The eurozone economy slowed in the first three months of this year, denting but not ending hopes of another year of strong growth.
The eurozone economy entered 2018 on a high, having recorded its fastest expansion in a decade during 2017 as it outpaced the U.S. for the second straight year. That surprisingly strong showing inspired only semi-facetious references to a “euroboom” among participants in financial markets, while the claim that “Europe is back” was given some credence by business leaders at their annual gathering in Davos, Switzerland.
But figures released by the European Union’s statistics agency Wednesday recorded a dip in growth during the first quarter, as the currency area’s gross domestic product—the most comprehensive measure of the output of goods and services in an economy—increased at an annualized rate of 1.7%, down from 2.7% in the fourth quarter of last year. That was a weaker expansion than the 2.3% recorded in the U.S. during the same period.
The figures didn’t come as a surprise, since measures of output in industry and construction, as well as figures for retail sales, had pointed toward an easing of growth. What isn’t yet clear is whether the factors that lay behind the slowdown were temporary, or will prove more long-lasting headwinds.
“The big question now is whether the weather was the only cause of the slowdown, and therefore implying that the economy should rebound in the second quarter, or whether there is something more serious causing the slowdown,” said Azad Zangana, an economist at Schroders.
Economists believe that an unusually cold and snowbound March in Northern Europe had some impact on growth, as did strikes in Germany and France.
That view is partly supported by the variations in growth within the eurozone. Figures released separately by Italy’s statistics agency Wednesday showed growth was unchanged in the first quarter, as it was in Spain. But France slowed sharply, recording annual growth of just 1% in the first quarter, compared with 2.8% in the final three months of last year. German figures will be released on May 15.
Many economists continue to expect that for 2018 as a whole, growth will be close to last year’s 2.4% pace. Among the supports to growth is falling unemployment, with 83,000 people finding work in March as the jobless rate stayed at 8.5%, its lowest level since December 2008.
But there are also some signs that manufacturers, in particular, are running up against their capacity limits, and in particular finding it difficult to recruit workers with special skills. A survey of purchasing managers at manufacturing companies released by data firm IHS Markit on Wednesday showed activity slowed again in April.
“Supply constraints—including raw material scarcities, supplier delivery delays and skill shortages—have constrained production,” said Chris Williamson, IHS Markits chief business economist. “Strikes, bad weather and unusually high levels of illness have also plagued businesses. Some of these adverse factors are therefore likely to be reversed in coming months.”
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Unanswered questions about the durability of first-quarter weaknesses are likely to have a bearing on the European Central Bank’s next big decision, which concerns when and how to bring a bond-buying stimulus program known as quantitative easing to a conclusion. As 2018 began, ECB watchers expected policy makers to announce in June that the program would end in December, and possibly in September if growth and inflation proved strong enough. But many now believe the ECB will delay making that call until July, and that a September termination date is less likely.
Speaking at a news conference last month, ECB President Mario Draghi said members of the governing council hadn’t discussed the future of the program at their two-day gathering in Frankfurt because it was unclear what had happened to the economy at the start of the year.
“The reason why we didn’t discuss monetary policy per se is that the reading of the current developments since the beginning of the year is actually very important in deciding the next steps,” he said. “Careful assessment, monitoring, the use of more information, are all important components in the next decisions.”
Write to Paul Hannon at paul.hannon@wsj.com