Euro Zone Smashes Estimates Despite Weak Germany, High Inflation

(Bloomberg) --

The euro-zone economy expanded by more than three times the amount economists expected, putting it on a firmer footing as surging inflation and a possible Russian energy cutoff threaten to tip it into a recession.

Spain and Italy both reported second-quarter growth of 1% or more from the previous three months, buoyed by an influx of post-lockdown tourists. French gross domestic product rose after a surprise contraction at the start of 2022.

But, despite the upside surprise, Germany -- Europe’s No. 1 economy -- stagnated. And highlighting persistent difficulties, inflation in the 19-member currency bloc soared to a fresh record of 8.9%, surpassing forecasts.

The data didn’t move the needle for traders. They expect growth to slow further in the second half of the year and already pared wagers for interest-rate hikes sharply Thursday after lower-than-expected investor confidence numbers in Europe and a weak GDP reading in the US underscored the risk of a recession.

Europe’s outlook for the coming months is extraordinarily uncertain. While the summer tourism season is handing southern countries a boost, projections for later on are being downgraded as the Kremlin’s energy threats, lingering supply snarls and record consumer-price growth depress demand and output.

The International Monetary Fund said this week that Germany is set to be the worst performer in the Group of Seven nations in 2022 due to the reliance of its outsized industrial sector on Russian natural gas.

Key Developments

• German Recession May Have Started, Even If Rounded Data Say Otherwise
• Euro-Area Confidence Hits Weakest in 17 Months on Recession Fear
• German Inflation Unexpectedly Accelerates After Dip in June

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Bloomberg Economics on the euro zone (11:17 a.m.)

Chief European Economist Jamie Rush:

“For now, the impulse created by Europe’s re-opening and significant fiscal support are trumping the downdraft from the energy crisis. July inflation also topped expectations, but the full impact of Russia throttling Europe’s gas supply is yet to be felt. Add in tighter financial conditions and a sharp slowdown looks inevitable.”

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Euro-zone GDP, inflation (11 a.m.)

The economy grew by 0.7% from the previous quarter in the three months through June. Analysts had expected an advance of just 0.2%. 

Even so, the outlook has soured markedly in recent weeks, despite a strong labor market and government aid to cushion soaring inflation. Activity and confidence surveys suggest output may already be shrinking as the war in Ukraine raises uncertainty over Russian energy supplies. 

The European Central Bank maintained last week that a recession isn’t part of its baseline scenario, lifting interest rates for the first time since 2011. The ECB said inflation would remain “undesirably high” for some time.

In July, consumer prices surged by 8.9% from a year ago in July -- more than the 8.7% economists had predicted. Core inflation also reached a new high.

Italian inflation (11 a.m.)

Inflation unexpectedly slowed to 8.4% in July, with economists having estimated a new record of 8.8%.

While the ECB has only just begun to lift interest rates to tame prices, Italy’s government has been trying for months through about 30 billion euros ($30.5 billion) of relief measures.

They include payments for poorer families, a fuel-tax holiday and steps to trim energy bills at large factories. Another 14.3 billion-euro package is also in the works.

Bloomberg Economics on Germany (10:53 a.m.)

Economist Martin Ademmer:

“We expect growth to remain subdued at 0.2% in the third quarter. Soaring prices and reduced real disposable income will weigh further on the post-pandemic recovery in consumer-related services, while supply shortages in the industrial sector are likely to ease only gradually. Taking second-quarter data into account, Bloomberg’s nowcast model now points to a 0.9% contraction in the third quarter, flagging notable downside risk to our forecast.”

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Portuguese GDP, inflation (10:30 a.m.)

Output in Portugal contracted for the first time in more than a year, with the 0.2% drop slightly milder than economists surveyed by Bloomberg had seen.

Inflation, meanwhile, quickened to a euro-era record of 9.4% in July, according to a separate report on Friday.

Despite the squeeze, the Bank of Portugal sees tourism riding to the rescue as it returns to “pre-pandemic levels” this summer. In June, it raised its 2022 economic-growth forecast to 6.3%.

Slovenian inflation (10:30 a.m.)

Prices jumped 11% from a year ago in July as the cost of electricity, oil derivatives and food all advanced. That’s an acceleration on last month’s 10.4%, marking a new record.

Bloomberg Economics on Italy (10:14 a.m.)

Chief European Economist Jamie Rush:

“Italy’s economy posted surprisingly strong growth in the second quarter. The reopening of the economy following the pandemic and the deployment of European Union recovery funds buoyed activity, even as rocketing energy costs squeezed household spending power. Can this performance be sustained? A deepening energy crisis, ebbing sentiment and heightened political uncertainty all point to a slowdown.”

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German GDP (10 a.m.)

While private and public spending supported the economy in the second quarter, trade was a drag, according to the statistics office. Analysts surveyed by Bloomberg had expected growth of 0.1%.

There was, however, a steep upward revision for the first quarter, while the statistics office said that GDP didn’t fall in the final three months of 2021, as previously reported. 

Germany’s outlook is darker than most. As well as the cocktail of inflation and supply-chain kinks, an outsized reliance on Russian natural gas has left it at real risk of energy rationing this winter as the Kremlin limits deliveries. The situation in the coming months will likely worsen as industrial firms cut production or partially suspend operations. A recession is becoming ever-more likely.

Italian GDP (10 a.m.)

Italy navigated rising energy costs and dwindling confidence to notch growth of 1% last quarter. The advance came thanks to domestic demand, with expansion in services and industry.

There are more reasons too for optimism in recent sentiment surveys. 

But the departure of Prime Minister Mario Draghi and the early elections his resignation triggered are casting a shadow over the economy’s prospects, with S&P Global Ratings downgrading its sovereign-debt outlook to stable from positive.

Draghi has spent almost 30 billion euros ($30.4 billion) to cushion businesses and households from inflation and higher energy costs, and another 14.3 billion euros of aid is in the works after the country recorded better-than-expected tax revenues in the first half.

German Unemployment (9:55 a.m.)

German unemployment ticked up in July, jumping by 48,000 as refugees from the war in Ukraine joined the workforce, lifting the jobless rate to 5.4%. Economists had estimated an increase of 17,000.

Bloomberg Economics on Spain (9:36 a.m.)

Economist Ana Luis Andrade:

“The apparent disconnect between growth and inflation can be explained by re-opening effects, the EU-funded investment cycle and an improving labor market. The bigger question is whether this condition can be sustained. While Spain might be able to avoid gas rationing in the winter, a worsening of Europe’s energy crisis is the main downside risk to our second-half forecast for rapid growth.”

• For full REACT, click here

Spanish GDP, inflation (9 a.m.)

The economy grew 1.1% in the second three months of 2022 -- way above the 0.4% median estimate in a Bloomberg survey of analysts and faster than the previous quarter’s 0.2% increase.

Strong household consumption drove the surprise acceleration, with a further boost likely to come in the summer from an influx of foreign tourists, even as surging inflation dents consumption.

Prices jumped by a record 10.8% this month as a spike driven by electricity and heating costs spreads to food and services, separate data showed. The cost-of-living squeeze has prompted Prime Minister Pedro Sanchez to propose a windfall tax on profits at energy firms and banks, to fund fuel subsidies and provide other aid.

The government has cut next year’s economic-growth forecast to 2.7%, though that’s still well above the International Monetary Fund 2% projection.

Austrian GDP, inflation (9 a.m.)

Austria reported a second straight quarter of growth after its winter lockdown, with its economy expanding 0.5% from the previous three months. Tourism provided the strongest growth impetus, even as household consumption dropped.

Output is likely to rise by 4.3% this year, according to the WiFo research institute, which compiled Friday’s GDP data.

Inflation, meanwhile, quickened to a record 9.2% from a year ago in July. Fuel remained the key driver, with the country’s biggest refinery offline for repairs following an accident.

French inflation (8:45 a.m.)

July saw another all-time high for inflation in France -- the sixth month in a row a new record has been set.

Prices jumped 6.8% compared with 6.5% in June, despite the government spending about 25 billion euros ($25.3 billion) to mitigate soaring energy costs. Economists had expected a 6.7% advance in the EU harmonized measure.

While the government’s measures -- which include price caps for electricity and natural gas -- have kept inflation cooler than in the rest of Europe, prices are still increasing at the fastest pace since the 1980s according to a national gauge. What’s more, the current “tariff shield” is set to expire at year-end.

Lithuanian GDP (8:00 a.m.)

Output in the most-populous of the three Baltic countries on the euro zone’s northeastern flank fell for the first time in 1 1/2 years.

Rather than a blip, the 0.4% decline heralds the start of a recession, according to projections this month from the European Commission. GDP in neighboring Latvia plunged 1.4% last quarter, data released Thursday showed.

More so than elsewhere, inflation -- running at an eye-watering 21% -- is the main culprit in Lithuania, weighing heavily on household budgets. But proximity to the war in Ukraine is also fueling uncertainty that’s holding back investment.

Bloomberg Economics on France (7:55 a.m.)

Senior economist Maeva Cousin:

“Today’s reading confirms France has largely recovered from the shock of the pandemic, but the war in Ukraine and accompanying energy crisis are weighing heavily on the outlook. With inflation continuing to climb and surveys pointing to weak consumer and business confidence, growth is likely to fall back in the third quarter.”

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French GDP (7:30 a.m.)

French output rose by 0.5% -- more than the 0.2% median forecast in a Bloomberg survey of analysts. The result was largely down to trade, which contributed 0.4 percentage point to last quarter’s growth as exports of services improved and imports of goods declined.

But some may focus on the deteriorating consumer backdrop.

A separate publication from statistics agency Insee showed consumer-spending growth slowed to 0.2% from the previous month in June as purchases of manufactured goods dropped sharply. Confidence among French households has been declining for seven straight months and hit its lowest level since 2013 in July.

Dutch inflation (6:30 a.m.)

Inflation in the Netherlands accelerated to 11.6% in July from 9.9% the previous month, according to preliminary data published by statistics office CBS. The cost of energy, which remains the main driver of headline inflation, jumped almost 70% from a year ago.

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