The eurozone’s economy has returned to growth after a long period of stagnation as inflation in the 20-member currency area continues to fall from last year’s peak.
Activity expanded by 0.3% in the second quarter, while the inflation rate declined from 5.5% to 5.3% in July, said the EU statistics agency Eurostat.
There was also an improvement to previous gross domestic product (GDP) data, revealing that a recession announced in June based on previous estimates had in fact been narrowly avoided. The earlier release had said the economy shrank in the last quarter of 2022 and in the first of this year, but the revised figures showed 0% growth in January to March instead of a contraction.
Financial markets rose on the back of the positive figures, which showed the eurozone’s consumers and firms had been more resilient in dealing with rising interest rates than many policymakers had forecast.
The German stock market continued a streak of gains that pushed values to an all-time high, while Italy’s FTSE MIB added 0.5% to touch fresh 15-year highs, lifted by the state-controlled defence and aerospace group Leonardo.
However, analysts warned that the better-than-expected recovery across the single currency bloc meant the European Central Bank (ECB) was likely to increase interest rates further in the autumn.
Claus Vistesen, the chief eurozone economist at Pantheon Macroeconomics, said: “This won’t be welcome news in Frankfurt, and will help the hawks’ cause.
“Coupled with scary-looking second-quarter wage data, we still think that the ECB hawks will successfully push for one final hike in September, before the data turn decisively against them. This is a close call.”
The ECB has sought to calm economic growth and reduce inflation with a series of interest rate rises, following in the footsteps of the US Federal Reserve and Bank of England.
Last week, the ECB governor, Christine Lagarde, said further increases were possible after she announced a further 0.25 percentage point increase, adding that the central bank would be “data dependent” as it considered its next policy move.
Pushpin Singh, a senior economist at the consultancy CEBR, said: “An upward revision to past data means that the eurozone avoided a technical recession across the final quarter of 2022 and first quarter of 2023.”
He added that a big bounce in growth was unlikely, while the currency bloc “continues to be affected by elevated inflation and the ECB’s response of higher interest rates” which would “drag on growth in the near-term”, he said, forecasting a modest expansion in eurozone GDP this year of 0.8%, down from 3.5% in 2022.
Marc de Muizon, a senior European analyst at Deutsche Bank Research, said the underlying picture was less rosy and the ECB was likely to be more circumspect before raising borrowing costs again.
Bert Colijn, a senior economist at ING, said the differences between countries were large in terms of performance, adding to the difficulties for the ECB.
“The German and Italian economies continue to suffer, in part because their manufacturing sectors are larger and demand for goods remains in contraction. Germany saw flat GDP growth quarter on quarter after two quarters of negative growth, while Italy dipped back to -0.3%,” Colijn said.
“On the other hand, France and Spain continued to perform well. French GDP growth accelerated from 0.1 to 0.5%. Spain saw growth decelerate from 0.5 to 0.4%.”
