Eurozone growth beats forecasts despite surprise German drop
THE eurozone economy grew more than expected in the second quarter as resilient expansion in key countries allowed the region to shrug off Germany’s surprise contraction.
Gross domestic product rose 0.3 per cent in the three months through June, sustaining the same pace as it did at the start of the year. That exceeded the 0.2 per cent median forecast of economists as both France and Spain beat estimates and Italy kept growing, offsetting a 0.1 per cent drop in Germany.
A separate report in Spain showed inflation there weakened much more than expected to 2.9 per cent in July, driven by lower energy and food prices.
The uneven growth outcomes across the region showcase the challenge faced by European Central Bank (ECB) policymakers as they approach a judgment in September on whether the eurozone economy is looking fragile enough to justify another interest-rate cut.
The ECB cautioned earlier this month that expansion is set to be muted in 2024, and is vulnerable to any global weakness or an escalation in trade tensions.
The overall eurozone outcome is weaker than officials anticipated at their last forecasting round in June, and they have signalled openness to a possible rate move in September.
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Lower borrowing costs are “very much needed for consumers to start buying goods again”, Conrad Keijzer, chief executive officer of Swiss-based speciality chemical maker Clariant, said in an interview.
“There is a delayed effect absolutely, but when interest rates come down, it will fuel housing and construction markets.”
Ireland, the economy of which sometimes sways the overall outcome because of its role as a European tax base for multinationals, showed the strongest growth of any member of the currency region during the quarter. GDP there rose by 1.2 per cent.
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Officials will also take a close interest in inflation numbers this week. German data will also be published on Tuesday (Jul 30), with early regional data there suggesting that price growth held steady at 2.5 per cent, according to Martin Ademmer of Bloomberg Economics. Reports from the rest of the eurozone are due on Wednesday.
The overall inflation outcome for the region is forecast by economists to have held steady in July at 2.5 per cent, still noticeably above the ECB’s 2 per cent goal.
German bonds erased small gains after Tuesday’s releases to leave the 10-year yield steady at 2.36 per cent, close to the lowest since April. Money markets continue to price nearly a quarter-point reduction in September and two cuts by year-end.
Germany’s economy contracted because of a drop in investment in equipment and buildings, according to the federal statistics agency.
“The German economy is stuck in crisis,” Klaus Wohlrabe, head of surveys at the Ifo economic research institute in Munich, said in a statement.
“The third quarter offers little hope for improvement.”
Purchasing manager indices and Ifo’s much-watched confidence gauge for July suggest Europe’s biggest economy started the quarter on an even weaker footing, held back by continuing weakness in the manufacturing base that previously sustained export-led growth for much of this century.
In France, GDP rose 0.3 per cent in the three months through June, while the Spanish economy grew 0.8 per cent. Both of those outcomes matched the results in the first quarter and exceeded the median forecast of economists surveyed by Bloomberg.
France’s reading only partially captures the impact of the elections President Emmanuel Macron announced in June – three weeks before the end of the second quarter.
Since then, indicators have shown a surge in business uncertainty as companies worry if a new government could increase labour costs and taxation.
Insee’s report on second quarter showed growth was supported by exports and a slight increase in investment. Consumer spending was stable.
“This performance shows that France has outperformed for two years in a row,” Finance Minister Bruno Le Maire told journalists. “This performance is durable and solid.”
Spain, like France, benefited from net trade, but unlike its bigger neighbour, it also saw strong domestic demand during the quarter, according to the INE statistics agency.
The Spanish economy has outpaced its eurozone peers in recent quarters, buoyed by strong employment. Political uncertainty there has not affected confidence until now.
The government there was unable to get a budget approved for 2024 and its plan to present one for 2025 is shrouded in doubt after it lost a vote in parliament to approve key fiscal targets.
In Italy, the growth outcome matched the median forecast of economists. Services output held up during the quarter, while industry and net trade held back expansion.
The country’s economy is currently set to grow 0.9 per cent this year, based on the Bank of Italy’s estimates, though the government still hopes to get a result of 1 per cent. BLOOMBERG
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