In the second quarter of the current year, the eurozone economic system was on a growth trajectory and demonstrated such positive dynamic rates that exceeded the initial expectations of experts regarding the intensity of the rising of the corresponding indicator.
Gross domestic product (GDP) in the mentioned region increased by 0.3% from April to June 2024 compared to the result for the previous quarter. The relevant information was released on Tuesday, July 30, by the European Union’s statistics office. It is worth noting that the consensus forecast of economists surveyed by the media provided that the specified indicator would grow by 0.2%. The result, which exceeded expectations, is largely due to the rising GDP of France and Spain above the projected levels. The Italian economy is also on an upward trajectory. The positive results of the three mentioned countries offset a 0.1% drop in German GDP in the second quarter of the current year.
Paying attention to the issue of the state of affairs in the Spanish economic system, it is worth noting that in this country in July, a decrease in inflation was recorded, which significantly exceeded the preliminary forecasts for the dynamic of the corresponding indicator. The specified result, which is an objective economic reality for Madrid, is due to the impact of factors such as lower food and energy prices. In July, inflation in Spain was fixed at 2.9%.
At the same time, the overall positive result in GDP growth in the eurozone in the second quarter of the current year, which exceeded preliminary expectations, does not negate the fact that there is such a problem in the region as an uneven economic dynamic in terms of the specifics of the intensity of the corresponding process in different countries of the bloc. This state of affairs is what can be described as a kind of challenge for the European Central Bank. In September, the financial regulator will have to decide whether it is advisable to ease monetary policy against the background of different situations in the eurozone countries and also answer the question of the constructiveness of such measures in the context of the economic reality, which can be conditionally called the average indicator for the entire region. At the same time, the main task of the European Central Bank is to determine whether the economy of the mentioned bloc of countries is fragile enough to justify the continuation of cutting interest rates after the first lowering of borrowing costs in June in the last five years.
This month, the specified financial regulator warned that the pace of the rising economy will be muted in 2024. Also in the relevant context, officials of the European Central Bank noted that the dynamic of the mentioned indicator is exposed to external factors such as the state of affairs in the geopolitical relations space, which currently demonstrates the tendency to increase tensions, and the deterioration of the situation in the international trade area, where there is now a deterioration in interaction between the main players, which generates a negative environment in terms of growth prospects.
It is worth noting that the present economic reality in the eurozone does not belong to the category of those scenarios that local authorities assess as the most favorable. Against this background, there is a possibility that in September the European Central Bank may decide to change interest rates. It is worth noting that the realism of such actions on the part of the financial regulator is not the definitely maximum, but belongs to the category of higher than medium-level probabilities. A rise in interest rates in the eurozone in the foreseeable future is a scenario that can only be materialized if certain unforeseen events occur in the coming weeks that have some sort of shock effect on the economic situation. The current dynamic, which is not the best of all potentially possible, still does not provide such decisions on the part of the financial regulator.
Economist David Powell suggests that the European Central Bank will continue to take a cautious approach in the context of monetary policy changes. The expert draws attention to the fact that the financial regulator worries about a high level of inflation in the service area. In June, the corresponding indicator was at 4.1%. David Powell predicts that in September the Governing Council will cut interest rates by 25 basis points.
Conrad Keijzer, chief executive officer of Swiss-based specialty chemical maker Clariant AG, says that lowering the cost of borrowing is an extremely necessary solution for consumers to intensify their purchasing activity. He also noted that there is a delayed effect, but it is understood that cutting interest rates will become a factor affecting the situation in the housing and construction markets.
In the context of the economic results for the second quarter of 2024, special attention should be paid to the indicators recorded in Ireland. This country is the European tax base for multinational corporations. Global companies are interested in a kind of legal presence in Ireland to take advantage of benefits such as a low corporate tax rate, easy access to diverse markets, and a highly skilled workforce. The GDP of this country grew by 1.2% in April-June of the current year.
More complete information on inflation in the eurozone countries will be released this week. According to preliminary estimates, in Germany, which is the largest economy in Europe, the corresponding indicator continues to be stable, remaining at around 2.5%. This was reported by economist Martin Ademmer.
Experts interviewed by the media suggest that July inflation at 2.5% will be the average for the eurozone. It is also worth noting that the European Central Bank’s target is 2%.
Currently, the yield on 10-year German bonds is at 2.36%. The corresponding indicator is close to the lowest level in the last three months. In the money markets, there is currently an increase in the level of confidence that the European Central Bank will cut interest rates by a quarter point in September. Expectations are also strengthening that the financial regulator will make two decisions on monetary policy easing by the end of the current year.
Returning to the topic of the situation in Germany, it is worth noting that the federal statistics agency claims that the economic system of this country is on a downward trajectory due to a decrease in investment in equipment and buildings.
Klaus Wohlrabe, head of surveys at the Ifo Institute in Munich, says that the German economy is in the condition of crisis. Also, according to the expert, currently, there is little hope that the situation will improve in the third quarter.
Purchasing manager indexes and Ifo’s much-watched confidence gauge for July suggest Europe’s biggest economy started the current quarter with even weaker indicators. In this case, the negative impact factor is the weak manufacturing base, which in the past supported growth through exports.
There are widespread concerns among experts that the current state of affairs in the space of the economic system in Germany is not a manifestation of a short-term downturn, but a fundamental structural change. In part, the present tendencies in this environment are associated with a kind of deformation of Berlin’s business model against the background of deteriorating relations, including in the trade area, between the West and China. Joerg Kraemer, an economist at Commerzbank, says that German companies are currently facing damage due to the erosion of the country’s competitiveness. At the same time, according to the expert, consumers in this state are observing a drop in their own purchasing power due to inflation.
In France, GDP for April-June of the current year showed growth of 0.3%. In Spain, the corresponding figure for the second quarter of 2024 increased by 0.8%. It is worth noting that GDP growth in both countries corresponds to the pace of the appropriate dynamic, which was recorded in January-March of the current year, and exceeds the forecast of experts interviewed by the media.
It is also important that the data on the state of affairs in the French economic system only partially reflect the impact of the elections, which President Emmanuel Macron announced on June 9, three weeks before the end of the second quarter. Currently, Paris is recording an increase in uncertainty in the business environment. The strengthening of the corresponding sentiment is because companies fear that the new French government may decide to increase taxes and raise labor costs.
The Insee, French national statistics institute, report for the second quarter of 2024 indicates that the growth of the economy of the mentioned country is associated with exports and a slight increase in investment volumes. At the same time, consumer spending showed stability during the specified period.
French Finance Minister Bruno Le Maire, speaking with reporters, said that economic data for the second quarter of 2024 indicate that the country has recorded better results compared to other states for two years in a row. He also drew attention to the durability and solidity of the figures.
Hadrien Camatte, an economist at Natixis, says that the economic situation in France this year may still present a surprise. In this case, the expert implies the probability of the country’s GDP growth by 1.2% in 2024. If the corresponding scenario becomes an objective economic reality, the area of public finances will become a beneficiary of this state of affairs.
Spain, like France, is a beneficiary of net trade. Data from the INE statistical agency indicate that a high level of domestic demand was observed in this country during the second quarter of 2024.
Spain’s economic system is steadily on an upward trajectory. Over the past few quarters, the economy of this country has demonstrated growth rates that exceed the average result in the eurozone. The corresponding state of affairs is largely due to the high level of employment. Also in Spain, political uncertainty has not yet become a factor affecting confidence in the country’s economic system in its current configuration and the context of further prospects.
In Italy, the local government there was unable to get a budget approved for 2024. Also, plans to present a budget for 2025 faced difficulties because the government lost a vote in parliament to approve key fiscal targets.
The current economic situation in Italy meets the preliminary expectations of experts. The output of services in this country did not show any changes during the second quarter of 2024. At the same time, industry and net trade have become factors constraining economic growth. The Bank of Italy predicts that the country’s economy will rise by 0.9% in 2024. At the same time, the government of the country still hopes that the corresponding figure will grow by 1%. Italy’s GDP grew by 0.2% in the second quarter.
Bert Colijn, senior euro zone economist at ING, said in a note published on Tuesday that data for April- June 2024 indicated some recovery in the region’s economy. According to the expert, after stagnation throughout 2023, new information about the dynamic GDP indicates the beginning of a cautious revival. Bert Colijn also stated that the current state of affairs in the eurozone economy is better than the situation that was observed last year. According to the expert, the issue of the vector of further movement of the economic system of the region is now relevant. Bert Colijn noted that the latest data does not contain reasons to be sure that the mentioned process continues to accelerate.
Alexander Valentin, an economist at Oxford Economics, says that the case for additional interest rate cuts by the European Central Bank is intensifying as price expectations weaken.
It is worth noting that the European financial authorities perceive the ongoing in France Olympic Games as a kind of stimulus. Last Monday, July 29, Christine Lagarde, President of the European Central Bank, while talking to the media, expressed hope that the mentioned competitions might bring about that added confidence that is so much needed at the moment.
