Euro-area growth was faster than expected in the second quarter. But there are still good reasons to be pessimistic.
We, like many, were surprised by the euro-area second quarter GDP numbers published today. Quarter on quarter euro-area growth of 1% was the fastest recorded for three years; quarter on quarter German GDP growth of 2.2% was the strongest in 20.
But we remain of the opinion that the euro-area recovery will stall. There are two main reasons for our continued pessimism.
First, euro-area growth in the second quarter was driven by strong exports. But with growth appearing to ease in the US and China, the outlook for euro-area exports must be less buoyant.
Second, euro-area domestic consumption has for the moment shown little signs of picking-up, and with unemployment near 10% and most governments planning to tighten their fiscal policies – pretty aggressively – a sustained increase in consumer spending looks very unlikely.
All this keeps us sceptical on euro-area economic prospects. There were winners and losers in the data, with Greek GDP contracting by 1.5%. In the July edition of Signpost, we stressed that the problem of differing levels of competitiveness lay at the heart of euro area woes, and the latest data don’t suggest that this problem is in any way resolved. So still expect some bumpiness ahead.