The eurozone economy picked up speed in the first quarter of 2005 but March inflation was just above the European Central Bank's medium-term target level of 2 percent, the European Commission said on Monday. In a report on the economy of the 12-nation area, it said quarterly growth of 0.5 percent was due to improving domestic demand, and the bloc should continue to grow at a steady pace in coming months. But despite the improvement from 0.2 percent growth in the fourth quarter of 2004, the European Union executive cautioned the underlying strength of the economy should not be overestimated, referring to mixed signals from business surveys.
Eurozone inflation was confirmed at an annual rate of 2.1 percent in March, despite a monthly surge of 0.7 percent - the highest jump in the history of the data - due to a seasonal increase in the price of clothing.
Economists, however, were little concerned over the monthly rise in prices, noting it was due to the ending of winter sales and the core inflation rate was steady at 1.6 percent.
"The euro-area economy is estimated to have grown by 0.5 percent in the first quarter of 2005 compared with the last quarter of 2004 and is expected to remain around the same level for the following periods," the Commission said in the quarterly report.
This forecast is in line with the Commission's forecast from April 14 when it saw first quarter growth of 0.2-0.6 percent, expanding to 0.3-0.7 percent in the second quarter.
Eurostat, the European Union's statistics office, is set to release its estimate for first quarter growth in eurozone gross domestic product on May 12.
"The economy appears to have picked up in the first quarter of 2005 as domestic demand continues to improve in the euro area. But as business surveys have been sending mixed signals, the underlying strength of the economy should not be overestimated," the Commission said.
A sharp slowdown in the last quarter of 2004 combined with high oil prices, persistent euro strength and an easing of global growth has raised question marks over the prospects for euro zone growth in 2005 and both the Commission and the International Monetary Fund recently trimmed their forecasts to growth of 1.6 percent from 2004's 2.1 percent.
Many economists expect growth in the second quarter to ease from the first because of record high oil prices, which recently hit $58 a barrel, eating into consumers' disposable income.
Economists said the inflation figures were unlikely to prompt a rise in official eurozone interest rates.
"We believe the ECB can keep interest rates unchanged for many more months to come, particularly given the current worrying growth outlook. Indeed, we currently do not expect the central bank to act this year," said Howard Archer of Global Insight.
Both the monthly and annual rate of inflation, which confirmed Eurostat's initial estimate, were in line with the consensus of economists polled by Reuters. Euro zone inflation also stood at an annual 2.1 percent in February.