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The eurozone thrift shows resilience as GDP surpasses anticipations and inflation declines in the second quarter

August 2, 2023: Eurozone inflation decreases, and further growth figures indicated economic activity picking up in the dual quarter of this year but economists still worry a recession could be in the cards.

On Monday, according to preliminary data released, headline inflation in the euro area was 5.3% in July, lower than the 5.5% registered in June. Nevertheless, it remains well above the European Central Bank’s 2% target for the 20-member bloc.

Core inflation which removes food and energy costs, remained unchanged at 5.5% in July, which Andrew Kenningham, chief Europe economist at Capital Economics, said would be a “disappointment for policymakers.”

The euro area has been battling high inflation for the past year, leading the ECB to undergo a full year of consecutive rate hikes to bring prices down. Last week, the central bank raised rates by a quarter percentage point again, bringing its primary interest rate to 3.75%.

Initially, much of the price pressures in the euro area were coming from high energy costs, but in recent months food prices have contributed the most. This month, food, alcohol, and tobacco again drove inflation prices to rise by 10.8% in July, a hike that was lower than in previous months.

The inflation figures come against a backdrop of previously moribund growth, with GDP stagnating in the first quarter of this year. But separate data released showed that growth accelerated in the second quarter, expanding by 0.3% higher than the 0.2% expected by analysts.

However, Capital Economics’ Kenningham attributed the second-quarter GDP number to one-off increases in France and Ireland, which he said: “give a misleading impression of the underlying strength of the economy.”

″It does not change our view that the economy is heading for recession,” he wrote in a note after the release of the data.

“Excluding GDP growth would have been only 0.04%, or zero to one decimal position! As these factors are unlikely to be repeated in the coming quarters and the impact of monetary policy tightening is still intensifying, we think eurozone GDP will hire in the second half of the year.”

The economies of both France and Ireland proved relatively resilient in the second quarter, with the quit posting a GDP speed of 0.5%, while the latter developed by 3.3%.

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