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Eurozone growth surges as inflation hits fresh high


Jul 29, 2022
Eurozone growth surges as inflation hits fresh high


A surge in tourism as countries relaxed coronavirus restrictions has boosted growth in the eurozone and softened the impact of record-high inflation in the second quarter.

The region’s gross domestic product grew by 0.7 per cent in the second quarter, far stronger than the 0.1 per cent expansion forecast by economists. However, inflation was also up by more than expected, hitting a fresh high of 8.9 per cent in the year to July, up from 8.6 per cent in June and driven by a 40 per cent rise in energy prices and a 10 per cent increase in food prices as a result of Russia’s invasion of Ukraine. Both the GDP and inflation figures are flash estimates by Eurostat, the European Commission’s statistics bureau.

The core inflation measure, which strips out energy, food and tobacco prices, was up 4 per cent, still twice the level the European Central Bank is targeting. The bank last week raised interest rates for the first time in more than a decade, increasing the benchmark deposit rate by 50 basis points to zero. Friday’s figures raise the chances of another 50 basis point increase at the ECB’s next vote in early September.

The strong growth number was attributed to a boom in the hospitality sector following the easing of coronavirus restrictions across the currency bloc. “The acceleration in growth is mainly due to reopening effects and masks underlying weakness due to high inflation and manufacturing problems,” said Bert Colijn, senior economist at Dutch bank ING.

Tourism helped to spur growth in France, Italy and Spain, with the eurozone’s second-largest economy and two largest southern economies expanding by far more than forecast.

But output was flat In Germany, falling short of economists’ forecasts of a small expansion. Europe’s largest economy has been harder hit by a sharp increase in energy prices that has pushed inflation to its highest levels in four decades, weighing on consumer and business confidence.

French GDP grew 0.5 per cent in the three months to June, according to Insee, the country’s statistics authority. Strong export figures and a boost from the reopening of the economy following the winter Omicron wave of coronavirus infections helped it to return to growth after a contraction of 0.2 per cent in the first quarter.

In Italy, GDP growth of 1 per cent was far stronger than expected, according to preliminary estimates by the country’s statistical agency.

“We have all the foreigners back after two years,” said Marina Lalli, president of Italy’s National Federation of Travel and Tourism Industries. “We were worried that without Chinese and Russians, we could have problems, but we’re not experiencing what we were fearing.”

Lalli added: “Americans are spending a lot and are going to very expensive destinations, so we have a very nice, very rewarding season.”

But inflationary pressures were damping domestic demand, as concerns grow about the rising cost of living. “Italians are afraid to spend money,” she said.

Spain’s economy recorded strong second-quarter growth of 1.1 per cent after a modest expansion of 0.2 per cent in the previous three months.

However, Spanish consumer price inflation also accelerated to a 38-year high of 10.8 per cent.

Economists polled by Reuters had, on average, expected France’s quarter-on-quarter growth to nudge up just 0.2 per cent in the second quarter, after it contracted at the beginning of the year. Italian growth was forecast to be 0.3 per cent, Spain’s 0.4 per cent and Germany’s 0.1 per cent.

The impact of Russia’s invasion of Ukraine in the form of higher prices for energy and other commodities is likely to weigh on output over the second half of the year. Consumer confidence indicators are at record lows, with more households saying that they will delay major purchases. Political turmoil in Italy, where prime minister Mario Draghi recently resigned, has also worsened the outlook. Italy holds elections on September 25.

Andrew Kenningham, economist at Capital Economics, said the eurozone’s second-quarter output would “be by far the best quarterly growth rate for a while”.

“News that inflation was once again even higher than anticipated only underlines that the economy is heading for a very difficult period. We expect a recession to begin later this year,” he added.

Gas prices soared earlier this week after Russian energy company Gazprom said flows through its Nord Stream 1 pipeline that runs to Germany would slow to just 20 per cent of their normal level.

The higher cost of oil and gas imports resulted in a massive deterioration of Germany’s trade balance which knocked growth, said the federal statistics agency Destatis, adding that economic activity was buoyed by household and government spending.

While domestic demand in France did not grow in the second quarter, gross fixed capital formations — a key measure of investment — increased by 0.5 per cent compared with the first quarter. Exports grew by 0.8 per cent, imports declined by 0.6 per cent.


Image and article originally from www.ft.com. Read the original article here.