Economic activity across the euro area remains resilient, while momentum is improving in Germany despite weaker performance in France, according to Barclays.
At the same time, inflation is expected to rise sharply in August. Barclays strategists said recent European Central Bank communication supports the case for another interest rate increase in September.
Eurozone Growth Remains Resilient
Second-quarter GDP data from France and Germany showed that euro area growth was mainly supported by external demand.
Domestic demand, however, remained relatively weak.
Barclays estimates that euro area GDP expanded by 0.45% quarter-on-quarter in the second quarter. That figure is broadly in line with the earlier flash estimate of 0.44%.
French Economy Stagnates in the Second Quarter
France delivered a weaker-than-expected performance.
Second-quarter GDP growth was revised down to 0.0% from an initial estimate of 0.2%.
Exports rose by 2.9%, supported by strong demand for aeronautical products. However, a significant decline in inventories and another fall in investment offset those gains.
As a result, overall French economic activity remained largely unchanged.
Germany Shows Stronger Economic Momentum
Germany performed better during the same period.
Second-quarter GDP growth was revised upward to 0.3% from 0.2%, with external demand once again providing most of the support.
German exports increased by 2.0%, while manufacturing value added rose by 0.9%.
The manufacturing improvement was driven partly by stronger activity in the chemicals and electrical equipment industries.
Domestic demand remained relatively subdued despite the stronger headline growth.
Eurozone Business Confidence Improves
Recent survey data also point to improving economic conditions across the region.
The European Commission’s Economic Sentiment Indicator increased by 1.3 points to 98.4.
Germany’s Ifo business climate index also strengthened, rising by 2.1 points to 88.8.
According to Barclays, confidence improved across all major sectors. Manufacturing showed particularly encouraging signs as companies became more optimistic about the outlook.
Inflation Pressures Build Across Europe
Inflation remains a key concern for the European Central Bank.
Recent national data from France and Spain suggest that headline inflation accelerated further in August.
French inflation increased to 2.7% year-on-year from 2.4%. Meanwhile, Spain’s inflation rate jumped to 4.5% from 3.9%.
Barclays currently estimates euro area HICP inflation at 3.39% year-on-year. That is slightly below its previous forecast of 3.44%.
Producer Prices Signal Additional Inflation Risks
Producer price data are also showing renewed inflationary pressure further up the supply chain.
Spanish producer price inflation accelerated to 9.2% year-on-year in July, compared with 7.0% in June.
Higher electricity and natural gas prices were among the main contributors.
France also recorded an increase in producer prices, with annual PPI inflation rising to 4.3% from 3.6%.
These trends could eventually feed into consumer prices if higher business costs persist.
ECB Officials Signal More Rate Hikes May Be Needed
ECB Executive Board member Isabel Schnabel has warned that interest rates may need to rise further.
She pointed to the prolonged conflict in the Middle East and the stronger-than-expected resilience of the euro area economy as potential upside risks to inflation.
Schnabel also highlighted the growing persistence of energy-related price pressures, noting that they are increasingly spreading beyond oil markets.
September ECB Rate Hike Remains in Focus
Minutes from the ECB’s July meeting showed that policymakers broadly expected at least one additional rate increase.
Some officials were even open to raising rates at that meeting.
Barclays continues to forecast one final 25-basis-point increase in September.
If that happens, the ECB deposit rate would rise to a terminal level of 2.5%.
For investors, the combination of stronger eurozone economic activity and persistent inflation could keep ECB rate expectations at the center of attention in the coming weeks.
