Germany avoids recession, growth accelerates in France
A day after ECB President Christine Lagarde warned Europeans of risks to growth in the short term, signs of optimism are being recorded in the two largest economies of the Eurozone and among European consumers. The ominous climate in which the ECB announced its decision to raise interest rates once again is softened, as Germany has at least escaped the risk of recession for now and France is growing more than forecast, while inflation is falling and in both economies. There are also the most optimistic voices who rush to hope that the decline in inflation in the second economy of the Eurozone paves the way for ending the round of interest rate hikes by the ECB.
According to data released yesterday, inflation in France fell in July to the lowest level in the last 16 months, namely to 5% mainly thanks to the reduced cost of energy. The positive image of the French economy is reinforced above all by the data for the second quarter of the year, which show that its growth exceeds the pessimistic forecasts and reaches 0.5%. This is an acceleration of the growth rate from the rate of 0.2% that was the first quarter of the year and inspires hope that the growth rate of other Eurozone economies and the Eurozone as a whole may accelerate at the same time. After all, the 0.7% increase in investments in the second economy of the Eurozone, as well as the 2.6% increase in its exports, is considered an encouraging sign. Economists and financial analysts warn, however, that the decline in domestic demand in France may lead to a weakening of the Eurozone as a whole.
At the same time, the largest economy in the Eurozone, Germany, is emerging from the recession it slipped into over the winter, although its economy remains stagnant. German GDP was unchanged compared to the previous quarter and can be seen as a positive development precisely because Europe's largest economy is no longer contracting after a steady slide for a year. According to the German statistical office, private consumption in the April-June period was the one that stimulated the economy. In addition, the revised figures for the previous months have the winter recession smaller than originally estimated. Again, however, the German economy fell short of the marginal growth of 0.1% that economists had predicted. Commenting on the data, German chemical giant BASF predicted a recovery in chemical production in the second half of the year. Inflationary pressures are also tending to de-escalate in Germany, with inflation at 6.6% in July, down from 6.8% in June.
The news sparked an immediate reaction in the bond market as it boosted hopes for an end to interest rate hikes by the ECB. This is how the yield of the German government's two-year bond, which is susceptible to interest rates, fell. At the same time, however, in Spain inflation is accelerating, reaching 2.1% compared to the previous quarter. Auspicious news that concerns, however, the Eurozone as a whole as well as the E.U. is improving consumer confidence. In July, the relative index rose by one percentage point compared to June levels. It remained, however, in negative territory, specifically at -1.
As financial analysts point out, this small improvement is important as consumer psychology is a critical factor for growth and stability. When consumers express confidence in the economy and remain optimistic about their financial situation, then they are much more willing to spend money, invest it in some assets and thereby contribute to economic activity. Therefore, an improvement in consumer confidence can have a positive impact on many sectors such as retail sales, services and the manufacturing sector. Economic analysts believe that the improvement in consumer sentiment reflects a mix of factors such as the easing of pandemic restrictions and the gradual restart of economies. Given, moreover, that in some countries vaccination rates are very high, consumers in those countries engage in various kinds of economic activity without reservations. This sense of a return to normalcy may further boost consumer confidence and encourage spending.