Home Business Europe’s Economy Expanded in Spring, and Inflation Has Eased

Europe’s Economy Expanded in Spring, and Inflation Has Eased

Europe’s Economy Expanded in Spring, and Inflation Has Eased

Gross domestic product in the eurozone grew 0.3 percent in the second quarter of 2023, a stronger result than economists predicted. But the recovery, after zero growth in the first quarter, was not consistent across countries.

Germany, Europe’s largest economy, stagnated in the second quarter, and prospects for a recovery throughout the year remain low, as many of the country’s heavy industries rely on energy and have suffered from the price increases triggered by the war in Ukraine.

“The main cause for concern is the industrial sector, where despite dwindling supply chain problems, production continues to tread water and we see a downward trend on the intake of new orders,” said Fritzi Köhler-Geib, the chief economist with KfW, Germany’s state-owned investment bank.

Output in Italy, Austria and Latvia fell in the second quarter. But growth in Spain, where domestic demand was strong, and France, which saw an 11.2 percent jump in exports of transport equipment (in particular the delivery of a cruise ship), helped to lift the eurozone’s numbers.

Inflation across the eurozone dipped to an annual rate of 5.3 percent in July, down from 5.5 percent the previous month. The European Central Bank has increased interest rates at every meeting this year, as it tries to bring inflation down to its 2 percent target.

Last week, the bank pushed the deposit rate up a quarter of a point, to 3.75 percent, the highest since late 2000. Over the weekend, Christine Lagarde, the central bank’s president, told the French daily Le Figaro that “monetary policy has clearly begun to have an impact on lowering inflation.”

Some policymakers have pointed to the persistence of so-called core inflation, which strips out food and energy prices, as an indication that the eurozone is not out of the woods yet. Core inflation held steady at a 5.5 percent annual rate in July.

Ms. Lagarde has kept her options open ahead of the E.C.B.’s next meeting, in September. Monetary policy tends to work slowly, and policymakers will receive a lot of fresh data before then.

Although energy prices, which were a main driver of inflation over the past year, have eased and Europe is on track to make it through a second winter without significant amounts of fossil fuels from Russia, the war in Ukraine continues to be a drag on Europe’s economy.

And past rate increases have led to tighter lending conditions and declining demand for loans, which have driven down consumer spending across much of the eurozone. These trends have raised concerns among economists, with some warning that Europe remains at a risk of stagnation or even recession.

“On the whole, the eurozone economy recorded another underwhelming quarter,” said Ricardo Amaro, a senior economist at Oxford Economics. He noted that “the second half of the year is likely to be as underwhelming, if not more than the first half, with the eurozone economy risking stagnation or worse.”

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