Eurozone Q2 Growth Increases by More Than Expected as Inflation Hits New Record

By Scott Kanowsky

Investing.com -- Eurozone economic growth rose in the second quarter, according to preliminary figures from Eurostat, surprising estimates of an inflation-induced slowdown.

Seasonally-adjusted gross domestic product in the common currency area increased by 0.7% during the period, slightly up from 0.6% from the previous quarter. Economists had expected the figure to come in at 0.2%.

Fueling this uptick was heavy acceleration in both Spain and Italy, with the southern European economies growing by 1.1% and 1.0%, respectively. Analysts had estimated activity to edge up only marginally in Spain by 0.4%, and by 0.3% in Italy.

French GDP also rose 0.5% on the quarter, ahead of the 0.2% growth expected.

These increases helped offset the impact of a disappointing quarter in Germany. Growth in Europe's largest economy stagnated at 0.0%, below forecasts for a slight 0.1% increase.

"The acceleration in economic growth is mainly due to reopening effects and masks underlying weakness due to high inflation and manufacturing problems," said Bert Colijn, senior economist at ING, in a note.

The euro was trading higher by 0.22% at $1.0219 immediately following the release, while the pan-European STOXX 600 index jumped 0.83% to 436.36.

Coinciding with Friday's GDP figures was the release of fresh inflation data for the 19-nation Eurozone, which showed consumer price growth in the region failed to moderate in July. The flash consumer price index came in at a new record high of 8.9% compared to the prior year, up from 8.6% in June. Analysts had been anticipating the number to remain at that level.

The latest inflation reading will play into the European Central Bank's calculus for any upcoming interest rate rises. The ECB already increased borrowing costs for the first time in more than a decade this month, as president Christine Lagarde pledged to "deliver" a cool down in red-hot inflation.

But on Thursday, ECB Governing Council member Ignazio Visco warned that there was still a risk of a recession in the Eurozone.

Adding to these concerns were recent figures showing business activity in the area dropped for the first time since February 2021 due to surging prices and flagging orders. Consumer confidence also touched a record in July, according to a European Commission survey, with households facing spikes in both food and energy prices.

"From here on, we expect GDP to continue a downward trend as the services reopening rebound moderates, global demand softens and purchasing power squeezes persist. We expect that to result in a mild recession starting in the second half of the year," ING's Colijn said.

Meanwhile, earlier this month, forecasters surveyed by the ECB slashed their predictions for Eurozone GDP growth for both this year and next year.