While inflation in Eurozone shows signs of slowing down, it still remains much higher than the targeted 2%. Economists also pointed out other cracks in the Eurozone economy.
For the month of July 2023, the Eurozone has delivered a robust set of GDP numbers beyond market expectations. The new growth numbers show economic activity picking up during the second quarter with inflation slowing down. However, economists still fear that a recession could be on the cards.
In July, headline inflation in the euro area was 5.3%, lower than the 5.5% in June. However, it is still much higher than the European Central Bank’s target of 2%. Core inflation, which excludes food and energy prices, stayed the same at 5.5% in July. This outcome might be a “disappointment for policymakers,” according to Andrew Kenningham, chief Europe economist at Capital Economics.
For the past year, Eurozone has been facing high inflation, leading the ECB to implement consecutive rate hikes in an attempt to control prices. Last week, the central bank raised rates by another quarter percentage point, bringing the main interest rate to 3.75%.
Initially, the inflation was mainly driven by high energy costs, but in recent months, food prices have become the primary contributor. In July, food, alcohol, and tobacco prices increased by 10.8%, although this hike was lower than in previous months.
Eurozone GDP Beats Expectations
The inflation numbers came amid previously sluggish economic growth, with GDP remaining stagnant in the first quarter of the year. However, a separate data release on Monday revealed that growth picked up in the second quarter, expanding by 0.3%, surpassing the 0.2% forecasted by Reuters’ analysts.
Nonetheless, Capital Economics’ Kenningham believes that the second-quarter GDP increase in France and Ireland was due to one-off factors, which may present a misleading impression of the economy’s actual strength. In a research note, Kenningham added:
″[It] does not change our view that the economy is heading for recession. Excluding [France and Ireland] GDP growth would have been only 0.04% q/q, or zero to one decimal place! As these factors are unlikely to be repeated in the coming quarters and the impact of monetary policy tightening is still intensifying, we think euro-zone GDP will contract in the second half of the year.”
In the second quarter, both France’s and Ireland’s economies showed resilience, with France’s GDP rate being 0.5% and Ireland’s expanding by 3.3%. However, ING‘s Senior Euro Zone Economist Bert Colijn pointed out that Ireland’s growth was exceptional and without it, the overall growth would have been much lower. According to survey data, the economy has remained relatively stagnant, and there are concerns that the coming quarters may face downside risks.
Spain also performed well, experiencing growth of 0.4%. In contrast, Germany had weaker growth during the same three-month period.