Improvement in activity to continue across the eurozone, according to Schroders’ Zangana

Growth figures may urge the ECB to take more hawkish stance, says Schroders’ European Economist Azad Zangana.

Eurostat estimates that the eurozone economy, in aggregate, grew by 0.3% over the second quarter compared to the first, marking the end of the longest recession since the formation of the monetary union.

The recovery remains uneven as the core export orientated economies continue to lead the way, while the smaller peripheral economies continue to struggle in their implementation of austerity. Germany and Finland both recorded slightly stronger than expected growth of 0.7%, while France also outperformed expectations, achieving GDP growth of 0.5%. Meanwhile, Italy and Spain who have already previously reported their growth numbers, (-0.2% and -0.1% respectively) remain in recession.

Elsewhere, Portugal provided the biggest surprise by posting 1.1% growth over the quarter – a huge upside surprise against the consensus.

Details of the underlying drivers are thin for these initial estimates, but the French statistics office (INSEE) reported stronger growth in household consumption and changes to inventories as the key drivers to the pick up in French real GDP. The German statistics office (DESTATIS) reports an improvement in domestic demand, along with an improved contribution from net exports.

We expect the improvement in activity to continue across the eurozone in line with the PMIs but, as with the latest data, also expect most of the growth to be concentrated in countries that have not been involved in the sovereign debt crisis, and will therefore benefit from a greater proportion of their GDP growth coming from net trade.

In terms of the impact on monetary policy, the better than expected growth figures, along with the encouraging signals from private business surveys, may start to place pressure on the European Central Bank to take a more hawkish stance. However, only two months after the introduction of forward guidance and a significant amount of spare capacity, we doubt the ECB would consider tightening monetary policy anytime soon.


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