By Paul Hannon and Ed Frankl

The eurozone economy had a stronger-than-expected return to growth at the start of the year as inflation cooled, a sign that the currency area is starting to recover from the damage done by Russia's invasion of Ukraine.

The combined gross domestic product of the 20 countries that share the euro was 0.3% higher in the three months through March than in the final quarter of 2023, above the 0.1% expected by economists, the European Union's statistics agency said Tuesday.

It was the eurozone's strongest performance since the third quarter of 2022. On an annualized basis, the eurozone economy grew by 1.3%, still lagging behind the U.S., which recorded 1.6% growth in the same period.

Recent surveys indicate that activity in the U.S. private sector slowed in April amid signs of a pickup in other leading economies, another sign that global growth might be more balanced this year.

The eurozone economy has flatlined since late 2022 as Russia's attack on its neighbor sent food and energy prices soaring, and sapped business and household confidence. GDP fell in both the third and fourth quarters of last year, meeting a definition of recession widely used in Europe, but not in the U.S.

But there are signs of a recovery that economists expect to strengthen in the second half as cooling inflation boosts household spending power, and lower energy costs aid factory output.

"The latest economic indicators suggest that activity is gradually recovering after a period of stagnation," said Luis De Guindos, vice president of the European Central Bank, in a speech Monday.

As it was in the first quarter, that recovery is likely to be supported by a return to growth in Germany, the eurozone's largest member, which was particularly hard hit by disruptions to the supply of natural gas from Russia.

Germany's economy grew more rapidly than expected in the first three months of the year, having contracted more sharply than previously estimated at the end of 2023. The rebound was driven by investment spending and exports, according to the country's statistics agency.

The rebound was aided by a pickup in the output of energy-intensive factories, which suffered large falls in 2022 and much of 2023. Gauges of output in Germany's car industry, which includes automakers Volkswagen and Mercedes-Benz, and for the chemicals industry, which counts industry titan BASF, both posted substantial gains.

"There has been a lot of pessimism around the German industry recently", said BNP Paribas economist Mariana Monteiro. "People have thought, 'can it ever bounce back?' And the answer is yes."

Recent surveys point to an improved outlook for growth. Consumer confidence has risen to its highest level in two years, and a leading business-sentiment index has shown steady improvement from the start of 2024.

Manufacturers are "much less pessimistic," according to Clemens Fuest, head of the Ifo Institute, which runs the business survey.

But even as industry shows signs of recovery from the shock of the invasion, there are still considerable hurdles for Germany to overcome. While BASF recorded a pickup in output in the early months of the year, it has no plans to reopen facilities it closed as energy prices soared, and might even have further to go in reducing capacity in energy-intensive activities.

"There will be more to come because base chemicals will be for good, because of structurally higher energy costs, less competitive," Martin Brudermueller, BASF's outgoing chief executive, told analysts last week. "So we have to trim it more to the European demand."

Germany is mired in political uncertainty, governed by a coalition of two center-left and one center-right parties that struggles to reach agreements on budgets, which is weighing on investment. Shortages of skilled workers and the growing threat of competition from China in key sectors such as electric vehicles also concern economists.

However, Germany and the wider eurozone seem set to get a boost from lower interest rates in the second half of the year.

Figures also released by the European Union's statistics agency Tuesday showed consumer prices were 2.4% higher than a year earlier, still slightly above the European Central Bank's 2% target, but well down on their October 2022 peak of 10.6%. The core rate of inflation, which excludes volatile energy and food prices, eased to 2.7% in April from 2.9% in March.

The ECB has signaled it will respond to cooling inflation by lowering its key interest rate in June, and investors expect two to three further cuts in 2024, to be followed by more in 2025. With the Federal Reserve unlikely to match those moves, the euro might weaken further against the U.S. dollar, providing a boost for eurozone exporters.

Spain remained the fastest-growing of the eurozone's four largest economies, boosted by a revival in international tourism. France reported a slight pickup in growth, driven by a faster rise in consumer spending and a return to growth in business investment. Italy's economy also accelerated, boosted by exports.

Write to Paul Hannon at and Ed Frankl at

(END) Dow Jones Newswires

04-30-24 0536ET