Eurozone growth, inflation accelerating but recession looming later in the year

The euro-zone economy grew much faster than expected in the second quarter, but economists said this could be the economy’s last hurray before rising inflation and supply chain problems cause a mild recession in the second half of the year.

The stronger growth came despite stagnation in the bloc’s largest economy, Germany, where high inflation and fears of a gas crisis sparked by the war in Ukraine have meant consumer and business sentiment have plummeted, said economists.

The EU’s statistical office said euro-zone gross domestic product rose 0.7 percent qoq in the April-June period, up 4 percent yoy, ahead of expectations for a quarterly profit of 0.2 percent and a annual profit of 3.4 percent.

Meanwhile, inflation rose to another record high in July and may be months away from peaking, increasing pressure on the European Central Bank to opt for another big rate hike in September.

Consumer price growth in the 19 countries that share the euro currency accelerated to 8.9 percent in July from 8.6 percent a month earlier, well above expectations of 8.6 percent and well above the 2 percent target the ECB, said Eurostat.

“The acceleration in economic growth is mainly due to reopening effects and masks underlying weakness from high inflation and production problems,” said ING economist Bert Colijn.

“From here, we expect GDP to continue its downward trend as the reopening of services weakens, global demand weakens and purchasing power holds. We expect this to lead to a mild recession from the second half of the year,” he said.

The weak performance of the German economy was offset by much stronger-than-expected expansions elsewhere in the bloc, with France’s economy growing 0.5 percent in the quarter, Italy 1 percent and Spain 1.1 percent.

“However, it is clear that continued supply chain disruptions, rising energy prices and record-breaking inflation rates will have longer-term implications,” said Rachel Barton, Accenture’s European economist.

The good growth performance in the eurozone in the second quarter, combined with rising inflationary pressures, increased the likelihood that the ECB would hike rates again by 50 basis points in September rather than make a smaller hike.

“With inflation showing no sign of slowing down in the near term and the economic outlook not yet derailing, we expect the ECB to hike another 50 basis points in September,” said Nicola Nobile of Oxford Economics.

War in Ukraine looms over all European economies. Uncertainty over the course of the conflict has shaken consumer and business confidence, while fears remain that a complete disruption to Russian gas supplies would plunge the bloc into a much deeper downturn. Eurozone growth, inflation accelerating but recession looming later in the year

Fry Electronics Team

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