Eurozone Inflation Hits New Record in July, Q2 Growth Surprisingly Strong
The one-two punch of high inflation and low growth is expected to hound policymakers at the European Central Bank in coming months.

- Headline CPI outpaces estimates

- Annual core rate at new high but down on the month

- Q2 growth strong despite flat German economy

- Real Y/Y growth also beats forecasts

- Analyst warn that rise in GDP may be best news for a while

 

By Eric Culp, European Editor

LiveSquawk News

@EricCulpLS

 

29 July 2022 | 10:00 GMT

 

Eurozone inflation climbed to another new record in July, and stronger-than-expected economic growth in the second quarter was unable to coax any optimism from analysts about the future of business activity in the trading bloc.

 

“The much better-than-anticipated increase in Eurozone GDP in Q2 will be by far the best quarterly growth rate for a while,” wrote Andrew Kenningham, chief Europe economist at Capital Economics. “Indeed, 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.”

 

Bert Colijn, senior economist for the Eurozone at ING, said: “The acceleration in economic growth is mainly due to reopening effects and masks underlying weakness due to high inflation and manufacturing problems. Expect the economy to contract once the Covid-19 rebound effects are played out.”

 

Inflation still going strong

The first estimate for July consumer price growth rose to a record 8.9% from 8.6% last month, according to preliminary readings from the EU statistics office Eurostat. This month’s rise outpaced expectations and marked the third month in a row that inflation hit a new all-time high.

 

The core rate rose more than expected to a record 4.0% versus the 3.8% market forecast and the 3.7% reading from June. Both the headline and core numbers remain well distanced from the European Central Bank’s inflation target of 2% over the medium term. However, the core rate in July did slip 0.2% from June. 

 

Eurostat reported that annual price growth for energy in the Eurozone showed a marginal decline, but it only fell to just below 40% from a white-hot 42% last month. The growth rate of consumer costs for non-energy industrial goods, services, and food, alcohol and tobacco all rose in July, according to the office.

 

Consumer price growth this month exceeded expectations in most of the single currency area’s four largest economies. Germany – the biggest – led the way Thursday with a surprise spike in EU harmonised inflation to an annual rate of 8.5% from 8.2% in June. On Friday, French consumer prices beat the estimate with a 0.3-percentage point increase to 6.1%, Spanish inflation surged 0.6pp to 10.8%, but Italian price growth slipped 0.1pp to 7.9%

 

Eurostat said 10 of the 19 countries in the Eurozone had double-digit inflation in July.

 

Jump in growth

The Eurozone economy was surprisingly strong in the second quarter, with growth reported at 0.7% versus the first three months of the year to beat the estimate of 0.2% and the 0.5% reading in the previous period.

 

The annual real growth rate of 4.0% versus the year-earlier period outpaced the forecast of 3.4% and the 5.4% mark in the first quarter.

 

GDP growth was generally better than expected in the four biggest economies, which all reported Friday. Germany underperformed with a flat reading below the estimate of 0.1% and last quarter’s performance of 0.2%. France said business activity was up 0.5% versus the estimate of 0.2% and -0.2% in Q1. Italian GDP surged 1.0% compared to the 0.3% estimate and 0.1% in the previous period, and Spain said its economy grew 1.1%, which was well ahead of both the 0.4% forecast and the 0.2% mark set in the first quarter.

 

ECB faces same old quandary

The remarkable improvement in euro area growth followed dire news from the US on Thursday showing GDP there contracting 0.9% in the second quarter. This followed a 1.4% decline in the previous three months, which put world’s largest economy in recession in the first half, according to the broadly accepted definition of two consecutive quarters of economic contraction.  

 

A wide range of analysts are predicting a recession for the Eurozone, with recent indicators suggesting the economy in the currency area is already be shrinking.

 

Such expectations of declining growth are bound to further hamstring the ECB, which raised key interest rates a surprise 50 basis points earlier this month. Signs of a slowing economy could force the bank to be less hawkish as not to exacerbate weakening business activity even when faced with record consumer price growth.

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