Eurozone growth goes from strength to strength
The “flash” estimate for second quarter eurozone GDP shows quarterly growth accelerated to 0.6%, up from 0.5% from the first quarter.
This takes year-on-year growth up to 2.1% - the fastest rate of growth since the first quarter of 2011.
At this stage, only a handful of member states have published their second quarter GDP figures. However, highlights include France (0.5%), Spain (0.9%), Austria (0.9%) and Belgium (0.4%), most of which met or beat expectations.
It seems that the eurozone is finally getting over the sovereign debt crisis as growth has broadened among member states. Helped by ultra-loose monetary policy and a resurgence in world trade, the eurozone looks set to beat most forecasters’ expectations for the year.
Where next for the ECB?
This raises questions over the appropriateness of the European Central Bank’s (ECB) stimulus programme. Hawkish members of the governing council think that it may be time to reverse some of the policy measures, such as quantitative easing (QE) and the negative deposit rate.
The ECB is set to review its growth and inflation forecasts ahead of its 7 September meeting. While growth will have surpassed the Bank’s expectations, inflation is still likely to be a concern. The latest annual reading from July shows headline inflation at 1.3%. This is under the ECB’s target of close to, but below 2%. This suggests that there is still a need to provide stimulus for the economy.
Another concern that the ECB will need to consider is the recent appreciation in the euro. This should lower inflation over the next few quarters. It could also start to hurt export growth. However, while world trade is still accelerating, the recovery in underlying demand is likely to more than offset any currency effects in the near term.
We expect ECB president Mario Draghi to announce no change in interest rates and an extension to the ECB’s QE programme into 2018, but with reduced monthly purchases of €40 billion per month. We then expect a review of policy progress later in the year, where what is effectively tapering will continue.