Slight lull in the European economy in the second quarter, inflation continues to darken the horizon

Le retour des touristes en Espagne a dopé l

The European economy has some surprises in store. Almost six months after the outbreak of the conflict in Ukraine, economic indicators are showing signs of resistance. According to the flash estimate released by Eurostat on Wednesday August 17, growth in the monetary union’s gross domestic product (GDP) accelerated by 0.6% between April and June. In the first quarter, activity had increased by 0.5%. The European statistics institute revised its figures very slightly downwards (-0.1 point). In the United States, growth fell to -0.2% over the same period.

“The second quarter figure is a surprise. We had forecast a slight contraction in GDP of around -0.2%. France, Italy and Spain did better than expected […] For France and Spain, there was a stronger than expected rebound in tourism and accommodation and catering in the context of the lifting of health restriction measures. Exports of tourism services were stronger than expected. In France, the consumption of transport services performed well with a catch-up effect which continued in the second quarter”, said Hélène Baudchon, economist at BNP-Paribas interviewed by The gallery.

Despite these relatively favorable figures, the leading indicators for the euro zone (PMI indices) and those of household and business confidence indicate that activity is running out of steam in a large part of the Old Continent.

Eurozone economy slows down sharply

Germany falters

Unsurprisingly, the shock wave of the war in Ukraine shook the economies of the euro zone dependent on Russian gas. Europe’s leading economic power is bearing the brunt of the disastrous consequences of the war in Ukraine. GDP growth stagnated (0%) during the second quarter after a first quarter at 0.8%. After the two long years of the pandemic, the German economy is struggling. Very dependent on Russian gas for its industry, activity could fall into recession by the end of the year. “This summer break has not allowed the German economy to improve its outlook. On the contrary, two new risk factors can be added to the long list of challenges: very low water levels and the tax on gas. Germany is going to need an economic miracle to avoid falling into recession by the second half of the year”, explained ING economist Carsten Brzeski.

In fact, the intense episodes of heat waves this summer dried up the rivers, causing major difficulties for the circulation of goods and energy on the Rhine in particular. Added to this are the still-current supply difficulties due in particular to health restriction policies in China. As a result, investor sentiment calculated by the ZEW Institute fell in July to -55.3 points, its lowest level since 2011.

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Spain and Italy do well

In southern Europe, Spain and Italy, less exposed to the upheavals of war, are doing better. The Spanish economy accelerated by 1.1% in the second quarter after a disappointing start to the year (0.2%). As for Italy, activity rebounded to 1% after a particularly sluggish first quarter (0.1%). However, these encouraging results should be put into perspective.

Indeed, the Italian boot is facing a major political crisis. The surprise departure of the head of government Mario Draghi has plunged the Italian economy into a deep torpor. The far-right-led coalition made up of Matteo Salvini’s League and Fratelli ofItalya post-fascist party chaired by Giorgia Meloni tops the polls a few weeks before the decisive parliamentary elections for the future of Italy.

As for Spain, repeated droughts are jeopardizing certain strategic sectors. In the south of the peninsulafarmers fear the temperature spikes could cut nearly a third of olive oil production, of which the country is the world’s largest producer.

Eurozone growth: Spain, Italy and France are faring much better than Germany

Acceleration of GDP in France

In France, GDP growth accelerated by 0.5% in the second quarter after a disastrous first quarter at -0.2%. “In France, consumption has fallen but investment has resisted despite the uncertainties. There are colossal investment needs in terms of energy transition but also industrial sovereignty. Financing conditions for companies remain favorable even if they have tightened“, added Hélène Baudchon.

For now, most forecasting institutes (Insee, Banque de France, OFCE, Rexecode) have ruled out the black scenario of a technical recession (two consecutive quarters of negative growth) but persistent inflation could change the situation. Indeed, a large proportion of employees in the private sector recorded a fall in their real income, that is to say taking inflation into account, during the first half of the year.

Given the weight of consumption in the French economy, activity could stall by the end of the year. The general consumer price index, which stood at 6.1% in July, could continue to undermine the purchasing power of the French despite the numerous measures defended by the government in its purchasing power bill adopted in early August by Parliament.

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A brake on employment

On the employment front, the indicators point to a slowdown in the euro zone. The number of people in employment slowed down in the second quarter to 0.3% against 0.6% in the previous quarter. Despite this shortness of breath, “the good performance of employment in the euro zone is explained by still significant recruitment needs in companies. Hiring difficulties remain very significant, emphasizes Hélène Baudchon.

Inflation still threatens the eurozone economy

The consumer price index is still weighing on activity in the euro zone. Inflation was propelled to a new high by the war in Ukraine and Western sanctions against Moscow, to 8.9% in July, from 8.6% in June. “The inflationary shock is very significant. The peak of inflation is probably still ahead of us. The rise in the harmonized consumer price index (HICP) could reach 10% in the fall in the euro zone. Inflation could more significantly erode companies’ margins,” says the economist.

This indicator has reached a new high every month since November. In addition to soaring energy prices (fuel, gas, electricity), European households are increasingly faced with soaring food prices.

Among the components of inflation, energy still experienced the highest annual increase, although slowing, at 39.7% (compared to 42% in June). Food prices (including alcohol and tobacco) increased by 9.8%, after 8.9% in June. Those of industrial goods and services increased in July by 4.5% and 3.7% respectively, slightly up on the previous month. “There is a pendulum movement in the components of inflation. The prices of food, services and manufactured products are taking over from energy. The difficulty is that the weight of food is greater than that of energy in the household budget”, continues the economist.

In France, the prospect of the start of the school year with the increase in expenditure looks tense for the most modest households. Many families will have to tighten their belts as the prices of school supplies have soared in recent months.

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Monetary policy tightening

After having benefited from an accommodating monetary policy, the economy of the Old Continent could suffer again in the coming weeks. The European Central Bank (ECB) raised interest rates at the end of July for the first time in more than ten years, following a trend initiated by the US central bank. “The economic horizon is darkening” and this “for the second half of 2022 and beyond”, said ECB President Christine Lagarde. The next rate hikes expected in September and October could deal a serious blow to the economy of the 19.

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