Eurozone second-quarter growth was revised down to 0.2%, slowing from the first. Germany contracted while Spain grew stronger. The ECB is expected to cut interest rates by 25 basis points next week.
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Eurozone gross domestic product (GDP) is expected to grow 0.2% quarter-on-quarter in the second quarter of 2024, down from a previous forecast of 0.3%, Eurostat said in its third forecast published on Friday, with a similar downward revision to growth for the European Union as a whole.
These figures represent a slower pace of growth compared to the first quarter, when the euro zone and European Union both expanded by 0.3 percent.
Gross domestic product rose 0.6% in the euro area and 0.8% in the European Union in the second quarter compared to the same period last year.
Differences between Member States
There were wide disparities between Member States, with Poland leading the way with a 1.5% increase compared to the previous quarter, followed by Greece (1.1%) and the Netherlands (1.0%), while the largest declines were recorded in Ireland (-1.0%), Latvia (-0.9%) and Austria (-0.4%).
Among the major euro area economies, Germany contracted by 0.1%, while Italy and France posted modest growth of 0.2%. In contrast, Spain posted strong growth of 0.8% quarter-on-quarter.
Household final consumption expenditure fell 0.1%, imports increased 0.5% and gross fixed capital formation fell sharply 2.2%, all of which were significant drags on euro area growth. Government spending increased 0.6% and exports increased 1.4%, providing the main positives.
Economic slowdown could lead to ECB rate cut
“The latest data on consumer confidence, activity indicators (PMIs) and especially manufacturing are not very encouraging,” Piero Cipollone, a member of the European Central Bank’s governing council, told Le Monde newspaper earlier this week.
Cipollone expressed concern that these weak figures pose risks to the euro area’s growth prospects, stressing that they show that investment remains weak and businesses do not expect a strong recovery.
On inflation, Cipollone noted that the ECB forecasts inflation to return to its 2% target in the second half of 2025.
Asked about the possibility of a rate cut at the Sept. 12 meeting, Cipollone said, “The data to date supports our direction and we hope that this will allow us to continue with a looser policy stance.”
Market consensus is expecting a 25 basis point rate cut at the next ECB meeting.
Danske Bank says ECB will keep guidance flexible
“We expect Lagarde to acknowledge that the ECB is entering a phase of rate cuts, but not commit to a specific timeline for further rate cuts,” Danske Bank said in a report on Thursday.
The bank expects the ECB to stick to its data-dependent meeting-by-meeting approach and maintain flexibility in its policy guidance. Danske Bank also expects headline inflation to remain stable due to energy price forecasts, while its core inflation forecast will be revised slightly upwards.
But they warn that this is too aggressive, with interest rate markets already pricing in a 61 basis point ECB rate cut this year and just over 100 basis points next year.
Looking ahead, Danske Bank suggests that the FOMC meeting on September 18th will be crucial for the near-term trajectory of the EUR/USD exchange rate.
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The bank added: “August employment data is likely to confirm the Fed’s 25 basis point rate cut, which could provide some support to US yields and the dollar.”
