The euro-area recovery failed to gather momentum last quarter,as France unexpectedly stalled and economies from Italy to theNetherlands shrank.

Growth of just 0.2 percent for the currency bloc, half as muchas economists had forecast, adds pressure on the European CentralBank (ECB) to deliver stimulus measures next month in its battleagainst weak inflation and anemic output. While German expansiondoubled to 0.8 percent, that wasn't enough to offset renewedweakness across the region, including a 0.7 percent drop inPortugal.

ECB President Mario Draghi primed investors last week forfurther stimulus in June, saying the 24-member Governing Council is“comfortable with acting” next month. With the euro area's recoveryfrom a record-long recession still fragile, officials are battlingto revive price growth, with the inflation rate at less than halfthe ECB's target.

“The recovery is still more or less in train in most countries,but the headline number is disappointing and the horror show wasthe Dutch number,” said Richard Barwell, an economist at Royal Bankof Scotland Group Plc in London. “We think the ECB is going to actin June, and we think it will be a package of measures.”

The euro pared losses against the dollar after today's data werereleased, trading at $1.3674 at 11:21 a.m. in Brussels, down 0.3percent on the day. The Stoxx Europe 600 Index was down 0.1 percentto 341.21.

Dutch GDP fell 1.4 percent in the first quarter, the sharpestcontraction in the euro area, Eurostat said today. The Italian andFinnish economies shrank 0.1 percent and 0.4 percent,respectively.

Still, four quarters of growth have spurred some optimism amongcompanies in the currency bloc.

Belgium's Bekaert NV “expects sustained solid demand in Europe,”the world's largest maker of steel cord for tires said on May 14.“The upward trend in demand from automotive markets in Europe as ofthe second half of 2013, continued at the start of 2014.”

ThyssenKrupp AG, Germany's largest steelmaker, this week raisedits full-year earnings forecast and reported the first quarterlyprofit in almost two years after selling assets and cuttingcosts.

Yet the euro zone continues to struggle with the legacy of thedebt crisis. The unemployment rate was 11.8 percent for a fourthmonth in March, near the all-time high of 12 percent last year. Theannual inflation rate was 0.7 percent in April, Eurostat said todayin a separate report.

Potential Slowdown

The economy will probably expand 0.3 percent in the secondquarter, according to the median of 28 economists' forecasts in aseparate Bloomberg survey.

Even in the Eurozone powerhouse, Germany, there are signs of apotential slowdown in the second quarter. The ZEW Center forEuropean Economic Research in Mannheim, which aims to predicteconomic developments six months in advance, said this week itsindex of investor expectations slid for a fifth month in May to thelowest since January 2013.

The Bundesbank has warned that while the economy shows an upwardtrend, growth will slow “noticeably” in the three months throughJune.

The euro-area recovery is “proceeding at a slow pace, and itstill remains fairly modest,” Draghi said last week in Brusselsafter the ECB left its benchmark rate at 0.25 percent and itsdeposit rate at zero. “There is consensus about being dissatisfiedwith the projected path of inflation.”

While officials have stressed that no decision on policy actionin June has been made, economists from BNP Paribas SA to GoldmanSachs Group Inc. and Royal Bank of Scotland Group Plc predict theECB will cut interest rates.

Should the ECB decide to act, it might deploy multiple toolsrather than just reducing borrowing costs. Options include offeringmore long-term loans to banks or halting the sterilization ofliquidity from crisis-era bond purchases under the SecuritiesMarkets Program.

“We never precommit unconditionally, but there is a row ofpossibilities,” ECB Executive Board member Yves Mersch saidyesterday in Berlin.

Draghi will present revised macroeconomic forecasts when policymakers meet in Frankfurt in June. The ECB predicted in March thatGDP will rise 1.2 percent this year, 1.5 percent in 2015 and 1.8percent in 2016. Inflation is projected at 1 percent in 2014,accelerating to 1.5 percent in 2016.

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