Légère accalmie sur l’économie européenne au second trimestre, l’inflation continue d’assombrir l’horizon

Le retour des touristes en Espagne a dopé l

The European economy has some surprises in store. Almost six months after the outbreak of the conflict in Ukraine, economic indicators are showing signs of resilience. According to the preliminary estimate published by Eurostat on Wednesday, August 17, the growth of the monetary union’s gross domestic product (GDP) accelerated by 0.6% between April and June. In the first quarter, activity had increased by 0.5%. The European Statistics Institute revised its figures very slightly downwards (-0.1 point). In the United States, growth fell to -0.2% in the same period.

“The data for the second quarter is a surprise. We had forecast a slight contraction in GDP of around -0.2%. France, Italy and Spain did better than expected […] For France and Spain, there was a stronger than expected rebound in tourism and accommodation and restaurants in the context of the lifting of health restriction measures. Exports of tourist services were stronger than expected. In France, the consumption of transport services performed well with a recovery effect that continued in the second quarter”, said Hélène Baudchon, an economist at BNP-Paribas interviewed by The galery.

Despite these relatively favorable data, the leading indicators for the euro zone (PMI indices) and those of household and business confidence indicate that activity is slowing down in much of the Old Continent.

Eurozone economy slows sharply

Germany wavers

Unsurprisingly, the shock wave from the war in Ukraine rocked eurozone economies dependent on Russian gas. Europe’s leading economic power is bearing the brunt of the disastrous consequences of the war in Ukraine. GDP growth stagnated (0%) during the second quarter after a first quarter of 0.8%. After two long years of the pandemic, the German economy is in trouble. Highly dependent on Russian gas for its industry, activity could enter a recession at the end of the year. “This summer break has not allowed the German economy to improve its prospects. On the contrary, two new risk factors can be added to the long list of challenges: very low water levels and the gas tax. Germany is going to need a miracle economic turnaround to avoid falling into recession in the second half of the year,” explained ING economist Carsten Brzeski.

In fact, the intense episodes of heat waves this summer dried up the rivers, causing great difficulties for the movement of goods and energy on the Rhine in particular. To this are added the supply difficulties still in force due in particular to the health restriction policies in China. As a result, investor sentiment calculated by the ZEW Institute fell in July to -55.3 points, its lowest level since 2011.

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Spain and Italy do well

In southern Europe, Spain and Italy, less exposed to the upheavals of war, are doing better. The Spanish economy accelerated by 1.1% in the second quarter after a disappointing start to the year (0.2%). As for Italy, activity picked up to 1% after a particularly slow first quarter (0.1%). However, these encouraging results need to be put into perspective.

In fact, the Italian boot is facing a major political crisis. The surprise departure of Prime Minister Mario Draghi has plunged the Italian economy into deep lethargy. The coalition led by the extreme right formed by the League of Matteo Salvini and fratelli ofItalya post-fascist party chaired by Giorgia Meloni He leads the polls a few weeks before the decisive parliamentary elections for the future of Italy.

As for Spain, repeated droughts endanger certain strategic sectors. In the south of the peninsulaFarmers fear that temperature spikes could cut nearly a third of olive oil production, of which the country is the world’s largest producer.

Eurozone growth: Spain, Italy and France are doing much better than Germany

GDP acceleration in France

In France, GDP growth accelerated to 0.5% in the second quarter after a disastrous first quarter of -0.2%. “In France, consumption has fallen but investment has resisted despite the uncertainties. There are colossal investment needs in terms of energy transition but also industrial sovereignty. Financing conditions for companies remain favorable although they have tightened“, Hélène Baudchon added.

For now, most forecasting institutes (Insee, Banque de France, OFCE, Reexecode) have ruled out the black scenario of a technical recession (two consecutive quarters of negative growth) but persistent inflation could change the situation. Indeed, a large proportion of wage earners in the private sector recorded a drop in their real income, that is, taking inflation into account, during the first half of the year.

Given the weight of consumption in the French economy, activity could come to a standstill at the end of the year. The general consumer price index, which stood at 6.1% in July, could continue to undermine the purchasing power of the French despite the many measures advocated by the Government in its purchasing power law approved at the beginning of August by the Parlament.

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A brake on employment

In the field of employment, the indicators point to a slowdown in the euro zone. The number of employed persons slowed down in the second quarter to 0.3% compared to 0.6% in the previous quarter. Despite this shortness of breath, “The good behavior of employment in the euro zone is explained by the still important hiring needs in companies. Recruitment difficulties continue to be very important, underlines Hélène Baudchon.

Inflation continues to threaten the eurozone economy

The consumer price index continues to weigh on activity in the euro zone. Inflation was pushed to a new high by the war in Ukraine and Western sanctions against Moscow, to 8.9% in July, from 8.6% in June. “The inflationary shock is very significant. The peak of inflation is probably still ahead. The increase in the harmonized consumer price index (IPCA) could reach 10% in the fall of the euro zone. Inflation could more significantly erode companies’ margins,” says the economist.

This indicator has reached a new high every month since November. In addition to skyrocketing energy prices (fuel, gas, electricity), European households are increasingly facing skyrocketing food prices.

Among the components of inflation, energy continued to experience the largest annual increase, although it slowed down, with 39.7% (compared to 42% in June). Food prices (including alcohol and tobacco) rose 9.8%, after 8.9% in June. Those of industrial goods and services increased in July by 4.5% and 3.7% respectively, slightly above the previous month. “There is a pendular movement in the components of inflation. The prices of food, services and manufactured products are replacing energy. The difficulty is that the weight of food is greater than that of energy in the household budget”, the economist continues.

In France, the perspective of the start of the school year with the increase in spending appears tense for the most modest households. Many families will have to tighten their belts as the prices of school supplies have skyrocketed in recent months.

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Monetary Policy Adjustment

After having benefited from an accommodative monetary policy, the economy of the Old Continent could suffer again in the coming weeks. The European Central Bank (ECB) raised interest rates in late July for the first time in more than ten years, following a trend started by the US central bank. “The economic horizon darkens” and this “for the second half of 2022 and beyond”, ECB President Christine Lagarde said. The next rate hikes scheduled for September and October could deal a serious blow to the economy on the 19th.

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