The eurozone economy grew slightly more than expected in the second quarter, as continued growth in France, Italy, and Spain offset yet another disappointing quarter in Germany.
Why it matters: The steady economic growth and a surprising rise in German inflation are putting the European Central Bank (ECB) in a bind for when it next meets in September.
The details:
- Overall growth was steady at 0.3 percent in the three months through June, and at 0.6 percent compared to the second quarter of 2023.
- Among the largest member states, Spain posted the strongest quarterly growth with 0.8 percent, followed by France and Italy, which expanded by 0.3 percent and 0.2 percent respectively.
- Germany, the eurozone’s largest economy, contracted 0.1 percent quarter-on-quarter, disappointing hopes that it had finally left stagnation behind.
- German inflation edged up again in July to 2.6 percent, instead of falling to 2.4 as expected, raising the prospect that Germany’s prolonged stagflation will continue in the coming quarters.
Germany’s poor performance risks proving a drag on the region’s overall performance in the coming months, analysts said. Latest survey data suggests that other eurozone countries may not be able to compensate for Germany’s weakness much longer.
What they’re saying:
- “The eurozone economy is quite like the water quality of the Seine,” ING Global Head of Macro Carsten Brzeski said. “Some days it may look okay but overall, it’s poor enough to continuously worry about it.”
- “The slight increase in German inflation not only highlights the stickiness of inflation but also suggests that a September rate cut is not a done deal yet,” Brzeski added.
- ECB’s head of markets, Isabel Schnabel, stated that the September meeting remains “wide open” despite heavy betting in financial markets on a cut.
The other side: UBS Global Wealth Management chief economist Paul Donovan emphasized the importance of taking a longer view and appreciating just how far inflation has come down. It is nine percentage points off its peak in Germany and seven points off in Spain.
What’s next: With inflation still refusing to die, it will be hard for the ‘doves’ on the ECB’s Governing Council to make the case for a September rate cut to stop the economy from falling back into stagnation.
Full story
The German economy contracted by 0.1 percent in the second quarter, disappointing hopes that it had finally left stagnation behind. Economists had projected a 0.1 percent increase in GDP. The bad news for the German economy didn’t stop there.
Inflation edged up again in July to 2.6 percent, instead of falling to 2.4 as expected. This raises the prospect that Germany’s prolonged stagflation will continue in the coming quarters. Business surveys have already pointed to a further deterioration at the start of the third quarter.
Germany’s poor performance risks proving a drag on the region’s overall performance in the coming months, analysts said. Latest survey data suggests that other eurozone countries may not be able to compensate for Germany’s weakness much longer. S&P’s composite purchasing managers index dropped to 50.1 in July from 50.8 in June.
German economy continues to stagnate
It remains just a notch above the 50-point threshold, which signals economic contraction. The European Commission’s economic sentiment index revealed a slight deterioration of confidence in the eurozone as a whole and a marked souring in France.
“The eurozone economy is quite like the water quality of the Seine,” ING Global Head of Macro Carsten Brzeski said, after the men’s triathlon at the Paris Olympics was postponed due to poor water quality. “Some days it may look okay but overall, it’s poor enough to continuously worry about it.”
The ECB has acknowledged that the region’s muted recovery remains vulnerable to risks from any global slowdown through an escalation in trade or geopolitical tensions. Latest data appears to confirm that the economy has remained weaker than projected by ECB staff in June, which had predicted consistent 0.4 percent quarter-on-quarter growth for 2024.
Moreover, the latest PMIs suggest that underlying growth momentum is slipping back below an annualized pace of 1 percent, J.P. Morgan economist Greg Fuzesi said in a note to clients. Yet, with inflation still refusing to die, it will be hard for the ‘doves’ on the ECB’s Governing Council to make the case for a September rate cut to stop the economy from falling back into stagnation. “The slight increase in German inflation not only highlights the stickiness of inflation but also suggests that a September rate cut is not a done deal yet,” Brzeski added.
On Friday, the ECB’s head of markets, Isabel Schnabel, had stated that the September meeting remains “wide open” despite heavy betting in financial markets on a cut.
- Politico.”Eurozone economy grows faster than expected in Q2″.
- Bloomberg.”Euro Zone’s Big Growth Laggard Has a Lot of Cheery Consumers”.
- CoinTribune.”Economy: Is Germany on the Brink of a Recession?”.