LDN - Business

Euro zone economy grows but outlook far from rosy

[July 30, 2024] By Francesco Canepa

(Reuters) - The euro zone's economy grew slightly more than expected in the three months to June, data showed on Tuesday, but a mixed underlying picture and a string of pessimistic surveys cloud the outlook for the rest of the year.

The figures paint a picture of a bloc that is struggling to regain its ground in global trade but continues to enjoy a domestic rebound fuelled by higher real incomes and public spending.

Output in the 20 countries that share the euro increased by 0.3% in the second quarter of the year, Eurostat data showed, keeping up the pace from the previous quarter and slightly beating economists' expectations.

Among large economies, France and Spain did better than expected, Italy held its ground while German output unexpectedly contracted, strengthening fears about a lengthy crisis in a country that was for a decade Europe's powerhouse.

Consumer confidence also remained negative in July, adding to a number of weak surveys in recent days.

"The euro zone economy is quite like the water quality of the Seine: some days it may look okay but overall it’s poor enough to continuously worry about it," ING economist Bert Colijn said in reference to Paris Olympics hosts' troubles with scheduling events because of pollution levels in the river.

The 0.3% quarterly increase in French GDP was a case in point.

While growth was a touch better than expected, this was partly due to the delivery of a single cruise ship boosting exports and offsetting flat consumer spending.

Still, it brought welcome relief to a country mired in political uncertainty and facing investor doubts about its growing debt.

"French growth could surprise on the upside this year and rise to around 1.2%," Hadrien Camatte, an economist at Natixis, said. "This is also good news for public finances, which would benefit from this growth pickup."

The Italian economy grew by 0.2% as inventories more than compensated for a drop in net exports, while Spain notched up a much stronger-than-expected 0.8%, in part attributed to public investments.

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A French flag and a European Union flag hang in the windows overlooking the Paris skyline near the Sacre Coeur Basilica in Paris, France, July 3, 2024. REUTERS/Yara Nardi/ File Photo

Germany lagged, with output falling by 0.1% due to lower investments in equipment and buildings in Europe's largest economy.

Economists worry that rather than a short-lived dip, the the data reflects Germany's fundamental lack of competitiveness, partly due to the disruption of its business model based on cheap energy from Russia and intense trade with China.

"Companies are suffering from the long-standing erosion of German competitiveness, and consumers are laboring under the recent inflation-induced slump in purchasing power," Joerg Kraemer, an economist at Commerzbank, said in a note.

Inflation rose in several German states in July, regional figures showed on Tuesday, indicating that a national reading due later in the day was unlikely to come below last month's 2.5%.

In contrast, price growth slowed more than expected in Spain to 2.9% from 3.6% in June.

Euro-zone-wide figures due on Wednesday will shed light on the case for a rate cut by the European Central Bank in September, with the market expecting one more cut by the end of the year.

"Although growth remains steady, we think the case for additional ECB rate cuts is strengthening as price expectations are easing," Alexander Valentin, an economist at Oxford Economics, said in a note.

(Additional reporting By Olivier Sorgho and Leigh Thomas in Paris, Belén Carreño in Madrid, Antonella Cinelli in Rome and Maria Martinez in Berlin; Editing by Tomasz Janowski)

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