Eurozone enjoying an economic recovery sweet spot

Summary

Eurozone Q2 GDP grew a stronger-than-expected 2.0% quarter-over-quarter, with particularly strong gains reported for Italy and Spain. July inflation remained contained overall, like the headline, CPI quickened only slightly to 2.2% year-over-year.

Confidence surveys and PMI data suggest that economic momentum continued into at least the early part of the third quarter, although the recent renewed rise in COVID cases means some caution remains regarding growth prospects.

Given this favorable growth and inflation mix, we expect the European Central Bank to maintain its accommodative monetary policy and, indeed, ease policy further in December by announcing a further increase in its bond purchase program.

Eurozone GDP jumps in Q2, July inflation remains contained overall

The latest batch of Eurozone data showed the region's economic recovery back on course, with a favorable mix of activity and inflation data. Eurozone Q2 GDP rose 2.0% quarter-over-quarter and jumped 13.7% year-over-year (Figure 1), the latter boosted by base effects. Not only was the outcome stronger than expected, but the sequential quarterly increase represented a return to growth after two straight quarters of contraction. Economic growth was also fairly broad-based across the region. With respect to the region's larger economies, German GDP rose 1.5% quarter-over-quarter, FrenchGDP was up 0.9%, Italian GDP rose 2.7% and Spanish GDP increased 2.8%. In terms of the countries that released details on the breakdown of growth, France saw Q2 household consumption rise 0.9%quarter-over-quarter, while Spain's Q2 household consumption surged 6.6%.

In addition to the confirmation of strong growth in Q2, survey data suggest that activity remained firm at least during the early part of the third quarter. Eurozone July economic confidence rose more than expected to 119.0, a record high since the series began in 1985. Among the details, both services confidence and industrial confidence rose, to 19.3 and 14.6 respectively. While the strong confident cesurveys (along with last week's PMIs) are encouraging for the Q3 growth outlook, some caution still remains regarding growth prospects given the recently renewed spread of COVID cases across the region. Accordingly, confidence surveys will continue to be watched closely in the months ahead for any hints of whether the latest wave of COVID cases is weighing on activity. 

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