Eurozone economic growth slows ahead of ECB meeting

Bloc sees 0.2% growth, strengthening case for a further cut in interest rates

European Central Bank president Christine Lagarde and its governing council are due to meet next week to decide on whether to cut interest rates further. 

Economic growth across the eurozone slowed between April and June, falling lower than initial estimates, providing the latest piece of bad economic news for the European Central Bank (ECB) ahead of its meeting next week.

Gross domestic product across the bloc rose 0.2% from the previous quarter — less than the 0.3% initially reported by the bloc’s statistics agency. While trade and government spending supported growth, investment continued to be a drag, Eurostat said.

Private consumption — seen as a key pillar of the eurozone’s recovery — failed to take off in the period even as households benefited from slower inflation, rising incomes and a resilient labour market.

Employment grew again in the quarter, though the pace slowed to 0.2% from 0.3%, Eurostat said.

A key source of weakness is Germany, the bloc’s biggest economy, where output shrank in the second quarter amid a prolonged weakness in the important manufacturing sector.

Industry also started the third quarter on a weak footing, according to data on Friday that showed production fell more than forecast in July, a trend also witnessed in France.

This disappointing economic data comes as eurozone wage growth eased, another key measure for the ECB, strengthening the argument for further cuts to interest rates.

Compensation per employee rose by 4.3% in the second quarter — down from 4.8% in the first three months of the year, according to calculations by Bloomberg Economics-based data from Eurostat published on Friday.

In June, the ECB had predicted pay growth of 5.1% for the period.

The data is among the last to arrive before an expected reduction in interest rates by the ECB next Thursday. Should inflation continue to abate, borrowing costs will be lowered every quarter until they reach 2.5%, according to a Bloomberg survey.

While inflation has slowed in recent months, pressures in the services sector — where wages play a larger role — have remained stubborn. 

The volatility is partly down to Germany, where some workers received large one-off payments to compensate for inflation at the start of the year. Some, including Executive Board member Isabel Schnabel, have warned that wage growth may pick up again in the third quarter.

But there’s also hope of further moderation down the line. ECB chief economist Philip Lane said last week that pay gains are set to slow sharply in 2025 and 2026 — increasing confidence inflation can be brought back to the 2% target next year.

Officials have also been keeping a close eye on corporate profits and workers’ productivity to get a full sense of price pressures in the eurozone. The latter kept declining in the second quarter — an issue that policymakers have increasingly highlighted as a concern.

Bloomberg