The euro area has reported an unexpected growth in its GDP by 0.3% quarter on quarter (QoQ) in Q2, according to a new report by Generali Investments.
Primary drivers behind this growth are robust foreign trade, especially from France, and stabilising consumption patterns in Germany, said the August ‘Market Perspectives’ report.
However, future prospects are less optimistic. The onset of Q3 has shown a general downturn in key sentiment indicators. Specifically, the composite Purchasing Managers’ Index (PMI) dipped to 48.9, signalling a potential contraction in output. Moreover, the forward-looking components in various business surveys show signs of weakening.
Despite these indicators, experts believe a full-blown recession is unlikely for the latter half of the year. A significant factor in this assessment is the anticipated moderation of inflation, which dipped to 5.3% year on year (yoy) in July.
By year’s end, driven by falling energy and commodity prices, inflation is predicted to fall below 3% year on year (YoY). This, combined with a robust labour market, is expected to bolster real income growth, leading to increased consumer confidence and spending.
Marting Wolburg, senior economist at Generali Investments, said the European Central Bank (ECB) has closely monitored these economic fluctuations. In its July meeting, the ECB increased the deposit rate to 3.75%. Adopting a data-driven approach, the bank is carefully assessing whether there’s a need for further rate hikes. Some anticipate another 25 basis point increase, taking the rate to 4.0% by September.
Wolburg states, “We think that the ECB’s growth forecast is far too optimistic. But we doubt that the updated inflation outlook will be benign enough to stop hiking. It became clear that the ECB remains worried about domestic inflation dynamics.”
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