July Consumer Prices, Q2 GDP Data Expected To Underline Eurozone Stagflation

- Headline CPI poised to rise to new record of 8.8% (prev 8.6%)

- Core rate set to rebound to all-time high of 3.8% (prev 3.7%)

- Quarterly GDP growth predicted to slip to 0.2% (prev 0.6%)

- Real Y/Y growth seen at 3.4% (prev 5.4%)

- Data due Friday at 09:00 GMT (11:00 CDT)

 

By Eric Culp, European Editor

LiveSquawk News

@EricCulpLS

 

27 July 2022 | 16:30 GMT

 

Eurozone stagflation should become even more glaringly apparent Friday when Brussels releases preliminary numbers for July consumer prices and the first estimate of second-quarter growth data.

 

Economists’ polls point to another record for inflation, with the annual headline number set to increase to 8.8% from last month’s historic high of 8.6%. The yearly core rate is expected to match May’s record 3.8% following last month’s dip to 3.7%.

 

Economic growth in the single currency area likely eased to a quarterly rate of 0.2% in the three months to June from 0.6% in the previous period, according to surveys. Real annual growth in the second quarter is expected to have slowed to 3.4% from 5.4%.

 

Germany – the biggest economy in the Eurozone – leads off inflation reporting Thursday (12:00 GMT). Its EU harmonised reading is expected to ease again, this time to 8.1% from 8.2% in June after the country instituted fuel tax breaks and began offering cheap commuter and railway tickets at the start of last month.

 

But things look different in the second- through fourth-largest economies. All are expected to announce higher consumer price growth Friday, with inflation in France forecast at 6.7% (06:45 GMT), in Spain at a blistering 10.4% (07:00 GMT), and in Italy at 8.8% (09:00 GMT).

 

“Having seen June CPI confirmed at 8.6%, […] the persistently high readings we’ve been seeing in respect of PPI (producer price index), which is at over 30% in several parts of the EU, means we probably haven’t seen the peak yet,” said Michael Hewson, chief market analyst at CMC Markets. “As such we could well see headline inflation rise closer to 9%.”

 

Oxford Economics said benchmark price growth would slip this month, noting that two distinct factors are tugging at costs. “Energy prices continue to make up bulk of the rise in prices and we expect them to climb further still. On the other hand, we anticipate food prices will have peaked in July and goods prices should also slow.

 

“Ultimately, slowing demand should put a damper on inflation, even if energy prices remain high.”

 

GDP: Not much to see. Literally

Meagre second-quarter growth is expected for the single-currency area, and the region’s four largest economies are all scheduled to report on the period Friday. Economists predicted France would return to economic expansion with a growth rate of 0.2% (05:30 GMT), Spain is expected to announce a doubling of its last quarterly growth rate to 0.4% (07:00 GMT), Germany is to see its economic activity halved to 0.1% (08:00 GMT, read our preview here), and analysts estimated that Italian GDP growth tripled to 0.3% (09:00 GMT).

 

“The available official monthly data suggest that activity fell in Q2 relative to Q1,” Capital Economics said in a note. “Eurozone construction and retail sales were a touch lower in April and May, while industrial production was broadly unchanged. Weighting these together points to the Eurozone economy contracting in Q2.”

 

Citi was struck a less pessimistic tone. “GDP data on Thursday (Belgium, Sweden) and Friday (rest of the euro area) could show that most economies were already growing at a very meagre pace. The exception could be tourism hot spots Spain and Italy, where real GDP growth likely re-accelerated in Q2 thanks to the re-opening of tourism.” It noted that over-performance will probably continue in Q3, but not beyond.

 

With the rise in prices and the drop in growth both apparently accelerating – purchasing managers’ indices are signalling economic contraction as energy costs soar – policymakers at the European Central Bank will likely feel the squeeze of the stagflationary coil even more on Friday. Their raison d'etre is to bring inflation back to the bank’s target of 2% in the medium term, but after raising interest rates a surprise 50bp last week, the ability of those central bankers to hike rates will dwindle with each step Europe takes toward to recession.

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