Euro zone economy sees strong rebound, inflation climbs above ECB’s target

The euro zone economy grew faster than expected in the second quarter, pulling out of a pandemic-induced recession, while the easing of coronavirus curbs also helped inflation shoot past the European Central Bank’s 2-percent target in July.

The European Union’s statistics office, Eurostat, said on Friday that its initial estimate showed gross domestic product (GDP) in the 19 countries that use the euro had expanded 2.0 per cent in April-June from the previous quarter.

Compared with the same period a year earlier, when lockdowns toslowthespreadofthecoronavirus brought economic activity close to a standstill, GDP jumped 13.7 per cent.

But unlike the U.S. and Chinese economies, which have pulled above their prepandemic peaks, the euro zone economy remains some 3 per cent smaller than it was at the end of 2019.

Eurostat also said euro zone inflation accelerated to 2.2 per cent in July from 1.9 per cent in June – the highest rate since October, 2018, and above the 2.0-per-cent mean expectation of economists.

Economic growth also surpassed a Reuters poll forecast of 1.5 per cent for the April-June quarteranda13.2-per-centannual increase.

Among the outperformers were the euro zone’s third and fourth largest economies, Italy and Spain, with quarterly growth respectively of 2.7 per cent and 2.8 per cent. Portugal’s tourismheavy economy expanded by 4.9 per cent.

Since the start of 2020 the euro zone has twice suffered two consecutive quarters of contraction – defining a technical recession – with coronavirus curbs hitting most recently in the period spanning the end of 2020 and the start of 2021.

Activity was dragged down in the first three months of this year largely by weakness in Germany, where a lockdown from November had curbed private consumption. Europe’s biggest economy returned to growth in the second quarter, but the expansion of 1.5 per cent compared with Q1 showed a weaker rebound than expected.

The French economy, the euro zone’s second largest, grew by 0.9 per cent, just ahead of forecasts, with its third lockdown gradually being eased from May.

The strong growth could add to arguments for the ECB to start scaling back its crisis-fighting measures.

The central bank’s €1.85-trillion ($2.74-trillion) Pandemic Emergency Purchase Programme is due to expire in March at the earliest, and policy hawks are already arguing that it is time to start tapering purchases given the bloc’s rebound.

Policy doves are warning that the more transmissible Delta variant of COVID-19 poses a threat to the recovery, however, so the ECB’s Sept. 9 meeting is too early for a firm call on winding down the scheme early next year.

Bert Colijn, senior economist at ING, said supply chain problems were likely to have hampered growth in Germany, with its large auto industry, while Italy and Spain saw impressive growth because they were further behind prepandemic levels.

Even with the Delta variant and continued supply chain issues, ING expects growth across the bloc to be 2 per cent again in the third quarter. “Despite all the greening efforts, the euro zone economy continues to perform like a diesel engine: It takes a while to get going but don’t underestimate it once it’s picked up steam,” Mr. Colijn said.

Capital Economics saw thirdquarter growth of a little over 2 per cent, which would still leave the euro zone economy smaller than before the pandemic.

“Germany should reach that [prepandemic] benchmark in the second half of the year, but we don’t expect the southern economies to do so until well into 2022,” its chief Europe economist, Andrew Kenningham, wrote in a note.

Figures on Thursday showed the U.S. economy grew at a slower than expected 6.5-per-cent annualized rate in the second quarter, pulling GDP above its prepandemic peak, as massive government aid and vaccinations fuelled spending on goods and services.

The equivalent euro zone rate was 8.3 per cent. For inflation, energy prices were again the driving factor, rising 14.1 per cent in July compared with a year before.