Euro zone: Economic growth bears hallmark of uncertainty – inflation slightly above 2 percent mark

The economy in the euro zone has decelerated noticeably since the final quarter of 2017. Compared with 0.7 percent at the end of 2017, gross domestic product (GDP) grew by only 0.4 percent at the beginning of the year and slowed to 0.3 percent in Q2, with the deceleration in economic activity more or less on a par in most of the major euro economies.

In France, the rail strike against the reform of the French state railways, which has since been implemented, slowed aggregate economic production down noticeably to 0.2 percent. A similar situation could also be seen in neighbouring Belgium. The Belgian economy has close ties with the French and German economies. The deceleration in momentum of the two neighbouring countries has evidently also left its mark here, with a meagre 0.3 percent being recorded. Spain is an exception in the otherwise rather subdued picture. Despite the domestic political upheavals in connection with the government crisis in June and the conflict still brewing in Catalonia, the economy managed to almost keep pace with the high momentum of the previous quarters. In the fourth largest country of the euro zone, a robust quarterly result of 0.6 percent was achieved. Germany will publish its growth rate for the second quarter on 14 August.

Overall, the effects of the uncertainties in the euro zone resulting from the smouldering trade conflict with the USA or the unilateral termination of the nuclear agreement with Iran seem to be gradually working their way into companies‘ export activities and investment plans. By contrast, the still intact and moderate recovery on the European labour markets is boosting private consumer demand. Construction investment is also likely to have contributed to growth.

Despite these adversities, sentiment in the private sector remains upbeat. The economy in the euro zone can therefore be expected to have stabilised at the moment following the slowdown in recent quarters, arguing for a robust underlying growth dynamic. In annual average terms, solid economic growth of 1.9 percent year-on-year could therefore still be notched up.

The inflation rate in the euro zone of currently 2.1 percent has again slightly surpassed the previous month’s level. And once again, it is external factors that are determining the trend of price developments, with the higher oil price on global markets having once again left its mark on consumer price development. On the other hand, domestic inflationary pressure remains subdued. This was recently demonstrated by the core rate, which excludes the more volatile price components of food and energy goods, and which has risen only slightly to a still moderate 1.3 percent.

As the year progresses, the inflation rate for the entire shopping basket can be expected to level off again, assuming that the oil price drifts sideways. In annual average terms, we therefore expect the inflation rate to lie at 1.6 percent.

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