Eurozone growth steady but political risks still remain

By John Fahey

Today sees the release of the first estimate of eurozone GDP figures for the second quarter of the year. 

The market consensus is for quarterly growth of 0.4%, which would equate to yearly growth of 2.2%.

This is a somewhat slower pace of growth compared to 2017. The eurozone economy registered softer but still solid 0.4% growth in the first quarter of the year.

This followed three quarters of 0.7% rises last year. In year-on-year terms, the economy expanded 2.5% in the opening three months of 2018. 

For 2017 as a whole, eurozone GDP averaged 2.4%. 

Leading indicators of activity for the second quarter suggested growth continued at a solid pace.

The limited hard data available for the second quarter are consistent with ongoing solid growth. 

Retail sales increased by a modest 0.4% in April/ May versus quarter one, in which they were flat. 

Meantime, industrial production, which has been volatile in recent months, declined 0.2% in April/May after falling by 0.6% in quarter one.

The goods trade data for April/May have been encouraging, suggesting external trade could make a positive contribution to growth in the second quarter, after being a drag on growth in the first quarter.

The labour market has continued to improve. The eurozone jobless rate fell to 8.4% in April, and held there in May. 

This represents its lowest rate since December 2008. On the inflation front, underlying price pressures in the currency bloc remain subdued. 

At 1.2% in June, core inflation is well below the ECB’s 2% target.

The July survey data released so far have supported the view that growth continues at a reasonable pace at the start of the third quarter. 

The ECB last week said recent economic data have been in line with its June economic forecasts of 2.1% growth this year. 

The eurozone economy still faces some challenges and risks. 

Unemployment remains high in many countries, productivity growth is weak, while there are a host of legacy issues from the global downturn.

Political developments also remain a concern, with anti-establishment parties having success in a number of countries and Brexit-related uncertainty increasing. 

The protectionist trade policies of the US are also a cause for concern.

Overall, the economy is expected to continue expanding at a solid pace as ECB monetary policy remains very accommodating.

John Fahey is a senior economist at AIB

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