(Bloomberg) -- The euro-area economy grew more than expected in the second quarter as resilient expansion in key countries allowed the region to shrug off Germany’s surprise contraction.
Gross domestic product rose 0.3% in the three months through June, sustaining the same pace as it did at the start of the year. That exceeded the 0.2% median forecast of economists as both France and Spain beat estimates and Italy kept growing, offsetting a 0.1% drop in Germany.
A separate report in Spain showed inflation there weakened much more than expected to 2.9% in July, driven by lower energy and food prices.
The uneven growth outcomes across the region showcase the challenge faced by European Central Bank policymakers as they approach a judgment in September on whether the euro-zone economy is looking fragile enough to justify another interest-rate cut.
The ECB cautioned earlier this month that expansion is set to be muted in 2024, and is vulnerable to any global weakness or an escalation in trade tensions.
The overall euro-area outcome is weaker than officials anticipated at their last forecasting round in June, and they have signaled openness to a possible rate move in September.
What Bloomberg Economics Says...
“The ECB is still likely to move cautiously as it worries about strong services inflation. We think the Governing Council will cut rates again by 25 bps in September.”
—David Powell, senior economist. For the full REACT, click here
Lower borrowing costs are “very much needed for consumers to start buying goods again,” Conrad Keijzer, chief executive officer of Swiss-based specialty chemical maker Clariant AG, said in an interview. “There is a delayed effect absolutely, but when interest rates come down, it will fuel housing and construction markets.”
Ireland, whose economy sometimes sways the overall outcome because of its role as a European tax base for multinationals, showed the strongest growth of any member of the currency region during the quarter. GDP there rose by 1.2%.
Officials will also take a close interest in inflation numbers this week. German data will also be published on Tuesday, with early regional data there suggesting that price growth held steady at 2.5%, according to Martin Ademmer of Bloomberg Economics. Reports from the rest of the euro zone are due on Wednesday.
The overall inflation outcome for the region is forecast by economists to have held steady in July at 2.5%, still noticeably above the ECB’s 2% goal.
German bonds erased small gains after Tuesday’s releases to leave the 10-year yield steady at 2.36%, close to the lowest since April. Money markets continue to price nearly a quarter-point reduction in September and two cuts by year-end.
Speaking after the GDP data, Croatian central bank chief Boris Vujcic was non-commital on what would happen at the next Governing Council meeting.
“We are now waiting for September when we will have much more data,” he told N1 TV in an interview. “Then we will have new projections and make a decision on interest rates.”
Output in Germany contracted because of a drop in investment in equipment and buildings, according to the federal statistics agency.
“The German economy is stuck in crisis,” Klaus Wohlrabe, head of surveys at the Ifo institute in Munich, said in a statement. “The third quarter offers little hope for improvement.”
Purchasing manager indexes and Ifo’s much-watched confidence gauge for July suggest Europe’s biggest economy started the quarter on an even weaker footing, held back by continuing weakness in the manufacturing base that previously sustained export-led growth for much of this century.
In France, GDP rose 0.3% in the three months through June, while the Spanish economy grew 0.8%. Both of those outcomes match the results in the first quarter and exceed the median forecast of economists surveyed by Bloomberg.
France’s reading only partially captures the impact of the elections President Emmanuel Macron announced June 9 — three weeks before the end of the second quarter.
Since then, indicators have shown a surge in business uncertainty as companies worry if a new government could increase labor costs and taxation.
Insee’s report on second quarter showed growth was supported by exports and a slight increase in investment. Consumer spending was stable.
“This performance shows that France has outperformed for two years in a row,” Finance Minister Bruno Le Maire told journalists. “This performance is durable and solid.”
Spain, like France, benefited from net trade, but unlike its bigger neighbor, it also saw strong domestic demand during the quarter, according to the INE statistics agency.
The Spanish economy has outpaced its euro-area peers in recent quarters, buoyed by strong employment. Political uncertainty there hasn’t affected confidence until now.
The government there was unable to get a budget approved for 2024 and its plan to present one for 2025 is shrouded in doubt after it lost a vote in parliament to approve key fiscal targets.
In Italy, the growth outcome matched the median forecast of economists. Services output held up during the quarter, while industry and net trade held back expansion.
The country’s economy is currently set to grow 0.9% this year, based on the Bank of Italy’s estimates, though the government still hopes to get a result of 1%.
--With assistance from Allegra Catelli, Simona Delle Chiaie (Economist), Alessandro Speciale, Constantine Courcoulas, Barbara Sladkowska, Giovanni Salzano, Simbarashe Gumbo, Rodrigo Orihuela, Jasmina Kuzmanovic, Simon Lee, Marton Eder, Marilen Martin, Mark Evans, Andrej Sokol (Economist) and James Hirai.
(Updates with ECB’s Vujcic starting in 12th paragraph)
©2024 Bloomberg L.P.