A stunning leap in Germany’s growth fuelled a sharp acceleration in the eurozone economy in the first quarter despite the credit crisis, but failed to quell fears that Europe will soon succumb to the global downturn.

Jean-Claude Trichet, President of the European Central Bank, led warnings from leading policymakers and officials that the eurozone’s powerful first quarter performance will almost certainly have seen its growth peak, and that it now faces a marked slowdown in the rest of the year.

The cautionary message from Mr Trichet was reinforced by Dominique Strauss-Kahn, the French managing director of the International Monetary Fund, who said in Brussels that the worst of the worldwide financial crisis may now be over, but its toll on leading economies was set to persist for months.

Despite those admonitions, the strong economic showing of both France and Germany, as well as the wider eurozone, was seized on by their leaders as evidence that Europe is weathering the global financial turmoil far better than the United States and is proving more resilient than many observers expected.

A surge in corporate investment in the eurozone’s two dominant economies was the main factor behind both Germany and France gathering steam in the first quarter (Q1). In Germany, Europe’s biggest economy, business investment spending climbed five-fold from levels at the end of last year.

Economists hailed Germany’s spectacular showing as its economy sprinted ahead, with GDP growth more than doubling from the final quarter of last year to a 12-year high of 1.5 per cent, twice the pace that analysts had predicted.

Growth in France also doubled, to 0.6 per cent in Q1 from 0.3 per cent in the previous three months, driven by a stronger export performance as well as its own booming levels of business investment.

The twin boosts to the economy eurozone as a whole from its two biggest members allowed the 15-nation bloc to bask in a steep rise in its overall growth rate to 0.7 per cent in Q1, from a more lacklustre 0.4 per cent in the previous quarter.

But economists sounded warnings over a series of economic vulnerabilities in Germany, France and the wider eurozone that meant it was likely to have already seen its best performance for a year, and perhaps longer.

Behind the upbeat news there were worrying signs that consumer demand across the eurozone is being sapped by the soaring cost of living triggered by sharply rising food and energy costs. Household spending stagnated in France in Q1 and remained subdued in Germany.

Eurozone inflation remains at historically high levels. Although official figures yesterday showed the bloc’s annual inflation rate dropping to 3.3 per cent last month, from 3.6 per cent in March, this remains far above the European Central Bank’s target of “close to, but below” 2 per cent.

Mr Trichet reinforced the ECB’s hawkish message that persistently high price pressures leaves little or no room for cuts in interest rates.

Yet worries over whether Germany will be able to sustain its potent start to the year, or will now falter badly were reinforced as its exports, the mainstay of its economy, failed to make any contribution to its buoyant first quarter.

Fears that the credit crunch will now undercut Germany’s growth were heightened by Bafin, the country’s financial regulator, as it said the impact of the crisis could worsen in coming months. “There is the danger that the financial crisis gets worse and still hits the real economy harder than expected,” Bafin concluded in its annual report.

Those worries were underlined by Mr Strauss-Kahn. He said that although "the worst news is behind us" on the financial crisis, “the main problem is the linkages between the financial crisis and the real economy and this is not behind us.”

Mr Trichet said that while yesterday’s figures had “vindicated” the ECB over its view that the eurozone would prove resilient, he still expected that “we will see some kind of slowing down”.

Yesterday’s news from other eurozone economies was less rosy, with Portugal’s economy shrinking by 0.2 per cent, while growth in Spain slowed abruptly to just 0.3 per cent, its weakest since 1993.

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