Eurozone Growth Revised Up to 0.6% as Exports Carry the Second Quarter

The eurozone economy grew faster in the spring than first thought. Eurostat said on Monday that output in the 21-country currency area rose 0.6% in the second quarter, revised up from an initial 0.4%. That is a stronger starting point for the European Central Bank as it prepares to raise interest rates again this week.

Across the wider 27-member European Union, GDP grew 0.7%. Employment in the euro area rose 0.1% over the quarter. Compared with a year earlier, eurozone output was 1.2% higher, up from the 1.0% estimated previously.

Where the growth came from

Trade did most of the work. Net exports added about 0.9 percentage points to quarterly growth, as exports jumped 3.4% while imports rose a more modest 1.5%. Household spending increased 0.4%, contributing around 0.2 points. Investment and government spending barely moved the total.

Inventories pulled the other way, subtracting roughly half a percentage point. That often means companies sold goods from existing stock rather than producing new ones, which can flatter the headline in one quarter and weigh on it in the next.

The picture varied widely between member states:

Spain: 0.7%, the fastest of the large economies.
Germany: 0.3%, revised up from 0.2%.
Italy: 0.2%, unchanged from the earlier estimate.
France: flat, revised down from 0.2%.
Ireland: sharply revised higher, adding to the aggregate.

Why it matters

The revision matters mainly because of its timing. The ECB meets on Thursday, and markets widely expect a quarter-point rise in its deposit rate from 2.25% to 2.50%. The case for tightening rests on inflation, which Eurostat's flash estimate put at 3.3% in August, up from 2.9% in July, driven by energy prices linked to the war in the Middle East.

Central bankers worry about raising rates into a weakening economy. A 0.6% quarter weakens that argument. It suggests businesses and households were absorbing the energy shock better than feared, at least through June.

The detail is less comforting. Growth leaned heavily on exports and on running down stockpiles, not on broad domestic demand. France, the bloc's second-largest economy, stalled. More recent figures also point to a softer third quarter: retail sales volumes fell 0.6% in July and services output dropped 0.3% in June.

Key points

Euro area GDP grew 0.6% quarter on quarter in April to June, up from a first estimate of 0.4%.
Annual growth was revised to 1.2%.
Exports rose 3.4% and were the biggest source of growth.
Inventories knocked about half a point off the quarterly figure.
Unemployment held at 6.4% in July, slightly higher than a year earlier.

Outlook

For the ECB, the revised figures support a rate rise this week without settling what comes next. Policymakers will want to know whether the export strength lasts as global demand cools and energy costs stay high, and whether household spending can pick up while inflation is running above 3%.

The third-quarter flash estimate, due at the end of October, will be the first real test. If the spring proves to be the peak, the argument over how far to raise rates will quickly become an argument over how soon to stop.

Image: Santeri Viinamäki via Wikimedia Commons, CC BY-SA 4.0