The EU economy stalls: zero growth in the second quarter and inflation still at 5.3%

The European economy remained frozen in the second quarter of the year, with 0% growth in the EU's GDP, and many countries in negative territory, according to preliminary data released this Monday by Eurostat.. This slowdown in activity, however, did not serve to contain prices, which in July continued to be 5.3% higher than a year ago.

After having rebounded by 0.2% quarterly between January and March, from April to June the EU economy has not grown at all (0.0%), with which the annual rebound that in the first quarter was 1, 1% compared to the same period of the previous year, now it has been cut to 0.5%.

This means that Spain is growing above average (it rose by 0.4% quarterly and 1.8% annually in the second quarter of the year). There are many countries that are contracting: Italy's GDP has fallen by 0.3%; that of Latvia, 0.6%; that of Austria, 0.4%, and that of Sweden, 1.5%; but none of them has yet had two negative quarters, so it is not yet possible to speak of a technical recession.

On the contrary, countries that were already in that recession situation, such as Germany (whose GDP fell by 0.4% in the last quarter of 2022 and 0.1% in the first of this year) have managed to get out of that situation even though it was with zero growth in the second quarter. Lithuania, which also had two negative quarters, grew by 2.8% up to June.

Although Germany has come out of recession, its stagnation translates into a drop in purchases from Spain, which in turn has been noted in the decline in our exports. According to the foreign trade data known up to May, sales of goods abroad had behaved better than in the previous year, so it is to be expected that the black month was June, for which there is still no Customs data.

If the data is taken only from the Eurozone, GDP grew by 0.3%, compared to the 0% growth in the first quarter and the fall of 0.1% in the previous one. For this reason, despite the fact that the data for the whole of the EU show that there is no growth, ING experts consider that they are not bad enough to invite the European Central Bank (ECB) to pause rate hikes, since the continent is not in recession and the Eurozone is growing: “For the ECB, which depends on the data, this GDP reading will not be a pessimistic argument at the September meeting, which will leave a new rise on the table,” he points out Bert Colijn, senior economist at this entity.

“The 0.3% rise in Eurozone GDP was better than expected, but is driven by very strong Irish activity, which is known to be volatile thanks to multinational accounting activity.. Without Ireland, growth would have halved. Looking through the more volatile components, we argue that the economy has remained flat overall.. Even so, for the ECB this will not be the main argument for taking a break in September,” he warns, since his only objective is for inflation to return to 2%, and that has not happened yet.

For the remainder of the year, he expects “monetary tightening to have its biggest negative effect on growth later,” so “continued broad-based stagnation in economic activity remains the most likely outcome.”.

From the consultancy Capital Economics they are also pessimistic: “The GDP of the Eurozone is not doing as well as it seems. The 0.3% increase in the second quarter was largely due to the huge increase in GDP in Ireland and the export of a cruise ship from France. Neither is a sustainable source of growth. Pending monetary policy tightening, we continue to believe that the Eurozone will soon enter a recession.”

Inflation does not abate

The cooling off in the European economy, which is idling close to zero, has not yet translated into a drop in inflation. The ECB is raising interest rates precisely to get the economy to suffer (private consumption and investment moderate due to the increase in financing costs) and price rises to become reasonable again (of around 2%).

However, this monetary policy, which is already having an effect on activity, is not yet affecting prices. According to advance data for July, headline inflation stood at 5.3% in the Eurozone, two tenths below that of June.

The biggest problem, as is the case in Spain, is in the core, which does not take into account the price of fresh food and energy products, and which is at much higher levels: 6.6% this month, also two tenths of a percentage point. below June level. In our country it stands at 6.2%.

Food is the product that is becoming more expensive and, given its weight in the consumer basket, it is the main cause of inflation; especially the processed ones, which are 11.3% more expensive in July than a year ago in the euro zone, compared to the fresh ones, whose price has risen by 9.2%.

Spain is the third country in the EU with milder inflation (2.1% in July in harmonized terms), only behind Belgium (1.6%) and Luxembourg (2%).. Conversely, Slovakia presents the biggest inflation problem (10.2% in July), followed by Croatia (8.1%) and Lithuania (7.1%).

In Germany, prices are 6.5% higher than a year ago; in France, 5%; in Italy, 6.4%; and in the Netherlands, 5.3%, so our country is the best positioned of the five large economies of the euro.