- Eurozone inflation drops slightly to 5.3% in July, still exceeding the European Central Bank's target.
- The GDP in the Eurozone surges in Q2 of the year, overcoming predictions.
- Economists warn about the possible onset of a recession despite the encouraging figures.
In the face of declining inflation and surging economic activity in this year's second quarter, economists continue to harbor worries about an impending recession.
The headline inflation in the Eurozone stood at 5.3% in July, a slight dip from the 5.5% recorded in June, as per data released on Monday. Despite the drop, the inflation rate is still notably above the 2% target set by the European Central Bank (ECB) for the bloc.
Maintaining a steady course, the core inflation, which conveniently leaves out fluctuating food and energy prices, persistently sat at 5.5% for July. This static outcome, as voiced by Andrew Kenningham, Chief Europe Economist at Capital Economics, proves a letdown for those at the policy helm.
For the past year, the Eurozone has been locked in a fierce struggle with high inflation. This ongoing struggle has necessitated a series of continuous rate hikes by the ECB for a full year, in a bid to quell escalating prices. Only last week, the ECB elevated rates by an additional quarter percentage point, pushing the principal interest rate to a new high of 3.75%.
Previously, soaring energy costs bore the brunt of the blame for the mounting price pressures in the Eurozone. However, lately, the burden of guilt has shifted more towards food prices. This July, the triple threat of food, alcohol, and tobacco once again spurred inflation, with prices swelling by 10.8%. This price hike, albeit lower than past increases, still remains significant.
The backdrop to these inflation figures is an encouraging resurgence in growth, with the GDP (Gross Domestic Product) experiencing a turnaround in the second quarter, following stagnation in the year's first quarter. Contrary to analysts' predictions of a 0.2% expansion, recent data release reveals that growth surpassed expectations, accelerating by 0.3%.
Nonetheless, Kenningham of Capital Economics points to one-off increases in France and Ireland as the source of the surprisingly positive second-quarter GDP number, dismissing it as a deceptive indicator of the actual economy's vigor. He predicts a likely contraction of the Euro-zone GDP in the latter half of the year as these transient factors wear off and the bite of monetary policy tightening becomes increasingly apparent.
France and Ireland both demonstrated economic resilience in the second quarter, with the former registering a GDP growth rate of 0.5% and the latter soaring by 3.3%. Meanwhile, Spain managed a decent growth of 0.4% but Germany disappointingly recorded no growth during this period.
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