Euro area: Weak growth not enough to lift inflation
While Euro-area GDP continues to grow, the pace of growth is not enough to lift inflation to the ECB’s target. The ECB increasingly realizes this and prepares to launch new easing measures in September.
- GDP growth slowed to 0.2% q/q as expected, with annual growth in track towards around 1% in 2019 as a whole
- Core inflation disappoints again
- Details still point to some upside trend in inflation
- The ECB will ease policy in September
The preliminary flash estimate showed Euro-area GDP expanding by 0.2% q/q in the second quarter of the year, down from 0.4% in Q1 but in line with expectations.Growth in Q1 was clearly a positive surprise, and taken together, the GDP data from the first half of the year still point to an economy clearly in a phase of expansion, even if the pace is rather slow.
If growth continued at the 0.2% pace in the second half of the year, roughly in line with the recent composite output PMI, GDP would grow by a bit more than 1% in 2019 as a whole, which is not a disaster but not really enough to bring inflation back to the ECB’s target.
No details on the drivers of growth were provided at this point, while the data from France and Spain give a bit of a mixed picture. GDP growth slowed from 0.3% q/q to 0.2% in France and from 0.7% to 0.5% in Spain. No estimate was provided for Germany at this point.
While the GDP numbers were in line with expectations, core inflation surprised to the downside once more.Inflation excluding energy, food, alcohol and tobacco fell from 1.1% y/y to 0.9%, still failing to show any meaningful uptrend. The unemployment rate still edged lower to 7.5% in June, but the slowdown in growth will probably mean also the unemployment rate is close to bottoming.
Given the absence of an uptrend in core inflation, weak GDP growth and the growth risks firmly pointing to the downside,the ECB looks likely to announce an entire package of stimulus measures at the September meeting.We expectsuch a package to include a 10bp cut in the deposit rate, restarting net asset purchases with a pace of EUR 30bn a month and strengthened forward guidance.
GDP growth back to around the levels implied by the PMI
Investments pick up in France
The slowdown in growth in France and Spain hides some positive aspects. More specifically, gross fixed capital formation accelerated sharply in France, while headline growth only decelerated because of the negative contribution from inventories. Export growth remained sluggish in France but rebounded in Spain.Investment, in turn, was weak in Spain.
Germany will provide the first estimate of its Q2 GDP only in around two weeks. Italian numbers will be released later today.
Euro-area inflation disappointed… again
Core inflation came in at 0.9% y/y in July, below consensus expectations at 1.0% y/y and down from 1.1% y/y (flash estimate was 1.2%) in June.
Headline inflation fell to 1.1% y/y in July, in line with expectations, but down from 1.3% y/y in June.
The flash estimate only comes with few details. Inflation for non-energy industrial goods (NEIG) remained low and services inflation dropped quite a lot, part of which is likely to be due to German package holiday prices.
Looking ahead, we expect core inflation to rise only gradually.Momentum has been fairly strong in recent months, but with Easter effects clouding the informational content of the Mar, Apr and May readings, it is still too early to look call an uptrend.
Slow rise in inflation still in the cards
Germany surprised among the big countries
France was closest to the ECB’s 2%-target this month with 1.3% y/y, followed by German inflation of 1.1% that took a hit from weaker package holiday prices again. Spanish (0.7%) and Italian (0.4%) inflation, in particular, remains worryingly low, likely also due to negative contributions from energy prices.
Headline inflation set to fall further before rebounding
HICP headline inflation estimates surprised with 1.1% y/y to the downside in Germany this month. The drop compared to last month’s reading, which was later revised from 1.3% to 1.5%, relates mainly to weaker services price inflation of 1.5% y/y compared to 1.9% y/y a month ago. Close to 0.2 pp of the decline in headline inflation can be attributed to lower package holiday prices (-0.1% y/y vs 6.0% y/y last month).
French headline HICP inflation estimates surprised consensus (1.2%) with 1.3% y/y to the upside. Compared to last month inflation slowed down marginally from 1.4% y/y in June. Like in Germany, the decline can be attributed to slower services price inflation of 1.1% y/y (vs. 1.2% in June). Also, lower energy price inflation contributed to the decline.
HICP headline Inflation in Italy slowed down for the third month in a row to 0.4% y/y surprising consensus to the downside and being 0.4 pp below the June reading. However, mostly energy prices contributed negatively to Italian headline inflation. CPI inflation excluding energy and food was up 0.1 pp compared to June, which likely implies that Italian data did not contribute to the lower Euro-area-wide core inflation.
The Spanish reading of inflation estimate in July was with an HICP of 0.7% y/y broadly in line with consensus. It accounts for a minor acceleration compared to June’s 0.6%. Notable about the Spanish July reading is also the upward trending monthly CPI inflation rate for July over the years since 2015.