Growth returns to eurozone with healthy rebound in second quarter

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The eurozone economy has bounced back from its historic pandemic-driven downturn, logging faster than expected growth of 2 per cent in the three months to June, according to data released on Friday.

The quarter-on-quarter rise in eurozone gross domestic product was higher than the 1.5 per cent expected by economists polled by Reuters and is the first time the bloc has outpaced growth in the US and China since the pandemic started last year. It also marked a strong rebound from the bloc’s 0.3 per cent contraction in the first quarter.

Economists said the growth figures were the latest signal that the eurozone was firmly on the road to recovery. Business and consumer confidence has rebounded strongly, boosted by the lifting of lockdowns in May and the rollout of vaccination programmes, while retail sales have returned to pre-pandemic levels. 

Germany, France, Italy and Spain all logged quarter-on-quarter expansions in output in the three months to June, and all but Germany outperformed economists’ expectations.

Economists blamed supply constraints, which have left manufacturers short of materials such as semiconductors, for holding back Germany’s growth to 1.5 per cent. That was below the 2 per cent expected by economists polled by Reuters, but a sharp improvement from the 2.1 per cent contraction in the first quarter.

Supply bottlenecks have also pushed up prices of manufactured goods; eurozone inflation rose faster than most economists had expected to 2.2 per cent in July, separate figures published on Friday showed, up from 1.9 per cent in June and its highest level since October 2018.

That takes it above the European Central Bank’s recently raised inflation target of 2 per cent. But core inflation — stripping out more volatile energy, food, tobacco and alcohol prices — fell from 0.9 to 0.7 per cent. The ECB expects inflation to drop back next year.

The eurozone labour market, which has been largely shielded from the impact of the pandemic by government furlough schemes, had its biggest improvement for more than a year as jobless numbers fell 423,000 to 12.5m in June and the bloc’s unemployment rate fell from 8 per cent to 7.7 per cent.

Economists expect the eurozone economy to continue to expand rapidly over the rest of the year despite the spread of the highly infectious Delta coronavirus variant.

“Vaccination rates are significant already and they are increasing steadily,” said Jean Pisani-Ferry, a fellow at the Bruegel think-tank in Brussels and at the Peterson Institute for International Economics. “Some renewed restrictions are likely, but I do not think governments will go for lockdowns as long as there is no risk for the hospital system to be overwhelmed.”

The US on Thursday reported second-quarter GDP growth of 1.6 per cent from the previous quarter, while China said earlier this month that its economy grew 1.3 per cent in the same period.

China topped its pre-pandemic output level last year and the US did the same in the latest quarter, but eurozone GDP is still 3 per cent below its pre-crisis level and only expected to catch up by the end of this year.

Carsten Brzeski, head of macro research at ING, said German industry had been hit by “a long list of supply chain frictions” and warned there “could now be problems with the [German] waterways due to heavy rains”.

France’s slightly better than expected 0.9 per cent growth was accompanied by an upward revision of its first-quarter GDP figures to show the economy flatlined, narrowly avoiding a double-dip winter recession. The French economy was boosted by a 1.1 per cent rise in investment and a 0.9 per cent jump in household spending.

Italian GDP rebounded to 2.7 per cent growth, outstripping economists’ expectations of 1.3 per cent. Loredana Maria Federico, an economist at UniCredit, cited “recoveries in services activity and household spending, which had been hampered by restrictions to limit the spread of Covid-19”.

Spanish second-quarter GDP rose 2.8 per cent, outstripping the 2.2 per cent expected by economists in a sharp rebound from its first-quarter decline of 0.4 per cent. The performance was fuelled by a 6.6 per cent rise in Spanish household consumption, which offset lower investment.