Stagnant eurozone likely bounce back

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Azad Zangana, European economist, comments on today’s eurozone GDP figures:

“Official estimates show the eurozone stagnated in the second quarter of the year following poor performance in core Europe, disappointing City expectations. The poor results mean that this has been the worst quarter for the monetary union since the first quarter of 2013 and raises questions over the direction of the growth heading into the second half of the year.

“Within the eurozone, Germany surprised most by posting growth of -0.2% quarter-on-quarter, while France also disappointed by stagnating for the past six-months. Meanwhile, early estimates for Italy revealed that it had slipped back into recession with a contraction of -0.2%. However, the eurozone aggregate was supported by some strong performances elsewhere, with both Spain and Portugal recording 0.6% growth, and Netherlands achieving 0.5% growth.

“While the aggregate GDP results are disappointing, it is worth remembering that the first quarter was unusually strong thanks to a very mild winter which boosted construction activity, particularly in Germany. Therefore, a pull-back in activity was always likely in the second quarter and should mean that the third quarter is stronger. However, the seasonal factors do not fully explain the latest weakness recorded. Another factor which may have already had an indirect impact on growth is the escalating crisis in Ukraine. The recent trade embargoes with Russia will not have had a chance to impact eurozone exports yet, but they may have hit confidence and prompted corporates to hold back or delay capital investment. The direct impact from trade is expected to be small, but will still feed through in the second half of the year.

“Overall, while the latest GDP figures are disappointing, there are some seasonal factors at play and we do expect eurozone growth to reaccelerate in the second half of the year. The monthly industrial production numbers – which provided an early warning of the latest weakness – have shown better momentum as the quarter ended. Indeed, the latest readings from the leading purchasing managers’ indices have already shown signs of improvement, with the new orders-to-inventories ratio signalling stronger growth. Moreover, the latest credit conditions survey from the European Central Bank (ECB) is also providing a more positive outlook – reporting an improvement in credit conditions and rising demand for borrowing.

“Nevertheless, there will undoubtedly be more pressure on the European Central Bank (ECB) to do more to boost growth. However, ECB president Mario Draghi is likely to argue that stimulus measures announced earlier this summer have yet to feed into financial markets or the real economy. We expect the ECB to wait for more evidence on the strength of the underlying economy before changing course.”

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