Eurozone growth lifts but Germany’s economy sees surprise fall

Economic growth in the eurozone exceeded expectations in the second quarter of the year, according to preliminary data from Eurostat released on Tuesday.

The eurozone’s gross domestic product grew at an annualised rate of 0.3% in the second quarter of 2024, matching the growth rate of the first quarter. This surpassed the anticipated 0.2% growth, indicating a slightly faster-than-expected recovery. Growth for the entire European Union also stood at 0.3% in the second quarter, maintaining the same pace as the first quarter.

Among the Member States with available data for the second quarter of 2024, Ireland (+1.2%) saw the highest quarterly increase, followed by Lithuania (+0.9%) and Spain (+0.8%). The largest declines were observed in Latvia (-1.1%), Sweden (-0.8%) and Hungary (-0.2%).

However, Germany, the eurozone’s largest economy, unexpectedly shrank by 0.1% on a quarterly basis in the second quarter of 2024. This reversed the 0.2% growth from the first quarter and fell short of forecasts of a 0.1% increase, as per preliminary data from the Federal Statistical Office. Investment in equipment and buildings dropped significantly as the industrial sector continued to be pressured by high interest rates.

In France, economic growth slightly exceeded expectations, with flash estimates from INSEE showing a 0.3% increase in GDP for the second quarter, consistent with the upwardly revised growth of the first quarter and above the projected 0.2%. Final domestic demand (excluding inventories) contributed positively to economic growth this quarter (+0.1 points after 0.0 points in the first quarter of 2024) due to a minor rebound in gross fixed capital formation (+0.1% after -0.4%). Household consumption remained steady this quarter (0.0% after -0.1%).

Italy’s economy grew by 0.2% in the three months ending in June 2024, down from the 0.3% expansion in the first quarter, and aligned with market expectations of a 0.2% growth rate, according to a flash estimate from ISTAT.

Economic sentiment steady in July, employment hopes decline

Meanwhile, the European Commission released the results of its business and consumer survey for July.

The Economic Sentiment Indicator (ESI) remained mostly stable in both the EU (+0.1 points to 96.4) and the euro area (-0.1 points to 95.8).

However, the Employment Expectations Indicator (EEI) saw a significant drop (EU: -1.6 points to 98.7, euro area: -1.8 points to 97.8), falling below its long-term average for the first time since April 2021 in both regions.

Industry confidence remained nearly unchanged (-0.1), with improved production expectations among managers being offset by a decrease in their assessment of the current order book levels.

The services sentiment indicator in the eurozone decreased to 4.8 in July 2024, falling short of market expectations of 5.5 and down from a revised 6.2 in the previous month. The consumer confidence indicator in the euro area slightly rose to -13 in July 2024, the highest level since February 2022 and consistent with preliminary estimates.

Retail trade confidence fell significantly (-1.1), mainly due to a sharp decline in retailers’ assessments of past and future business conditions, while their evaluation of stock volumes remained largely unchanged. Construction confidence improved slightly (+0.4).

Market reactions

The euro remained steady at 1.0830 against the US dollar shortly after the data release.

Yields on European sovereign bonds also stayed stable, with the Bund trading at a 2.37% yield. On shorter-dated maturities, Schatz yields dropped by 5 basis points to 2.60%, potentially indicating increased expectations of a more accommodative stance by the European Central Bank following Germany’s disappointing economic performance in the second quarter.

European equities attempted a modest recovery during Tuesday morning trading. The broader Euro STOXX 50 index rose by 0.5%.

The French CAC 40 and the German DAX both increased by 0.4%, while major equity indices in Italy and Spain edged up by 0.3%.

Top performers among Euro STOXX 50 constituents included ASML Holding, up 2.5%, and Deutsche Bank, up 1.6%. On the other hand, Phillips, Iberdrola, and Enel lagged, falling by 2.8%, 0.9%, and 0.8%, respectively.