Europe Takes A Breath

The Eurozone managed to grow in the second quarter by 0.3%. Which is an achievement in itself. The previous two quarters were a contraction of 0.1% and zero growth respectively.

On the yearly basis, the Eurozone grew by just 0.6%. All the time the ECB keeps raising rates to fight inflation. On that front there was some good news with inflation moderating slightly from 5.5% previously, to 5.3% in July.

This is however still too high for the ECB’s comfort. Unlike the US situation for headline inflation, the Eurozone level remains a more modest pullback from the peak. We should expect yet another rate hike from the ECB at its next meeting still, on the back of yesterday’s reading. The ECB in its wisdom, could even be encouraged to hike further by that modest GDP number.

While the headline inflation number slowed slightly due to lower energy prices for the moment, services price pressures continued to grow. The core inflation number actually held steady at 5.5%. Making further ECB hikes a certainty.

Italy GDP

On the economic activity side of the ledger, Italy is now at risk of joining Germany in Recession? After registering a contraction of 0.3% in the second quarter. The Italian economy has now contracted in two of the past three quarters. There are clearly holes appearing in what must be said remains a patch quilt of lacklustre economic performance.

For the Eurozone as a whole, widespread weakness in confidence and with the full impact of the ECB’s tightening of policy still to be felt, one has to consider this may prove to be a mere blip in economic performance.

As China continues to slow with particular regard to manufacturing and exports, the US manufacturing slow down remains intense, and consumer confidence everywhere languishes, for Europe as else where there seem challenges internal and external that point to a troubled second half of the year for the world’s major economies.

The Euro has been weakening for several weeks, and yesterday’s data is unlikely to alter this momentum. For the moment the Euro is in an immediate consolidation phase against the US dollar, but fresh falls may soon follow.

For some time the European stock market has been having a very strong run. Despite an almost quicksand feel to the economy all through the year. As with the US equity market, it is worth noting the apparent stretch between the economy on the ground, and the valuation of company shares.

The hope of a quick recovery from the weights of war and an aggressive ECB may have just peaked. Rather than been freshly inspired.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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