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EMU CommentWeaker growth but higher inflation

  1. GDP growth slowed to 0.3% q-o-q in Q2 - weaker than expected
  2. Inflation rose further above the ECB's goal in July
  3. Unemployment steady at 8.3% in June
ECB reassured in its cautious stance
Today's plethora of important data out of the eurozone showed a cooling economy and steady unemployment but slightly higher inflation. Overall, the figures will most likely reassure the ECB that it is taking the right approach in its current stance of a very gradual and careful removal of monetary stimulus, but we will most likely need to see a more marked downturn in the economy for the ECB to deter from ending its asset purchases in December. The reaction to the figures in FX and fixed income markets is expected to be relatively muted, as the stronger inflation outcome to some extent should be balanced by the weaker-than-expected growth outcome.
GDP growth slowed more than expected
GDP growth unexpectedly slowed to 0.3% q-o-q in Q2, which was below market expectations (0.4%) even though the slightly weaker national data available prior to the release might have lowered expectations somewhat. That was the weakest growth rate for the eurozone economy in two years, and comes as budding signs that uncertainty due to the threat of a trade war is beginning to have some impact on the economy. Thus, there was no clear rebound in the economy following the weak beginning to the year, but so far there are also no signs of a more pronounced slowdown beginning to form, even though sentiment indicators have continued to weaken somewhat into Q3, albeit they are remaining at relatively solid levels (see figure). There is no breakdown of the national accounts available yet. Even though GDP growth slowed in Q2, we still expect the economy to continue to grow above potential, adding further pressure on the labour market, wages and inflation, but we must admit that risks currently are perhaps tilted more to the downside.
Inflation picked up - unemployment steady
While GDP growth cooled, the flash estimate of inflation ticked up from 2.0% to 2.1% in July, which was a touch above expectations and a step further above the ECB's goal. The uptick seems to mainly reflect an uptick in core inflation with an increase from 0.9% to 1.1%, which was also above the expected increase to 1.0%. The rise in core inflation might have been caused by some holiday timing effects which will not be repeated, but the higher core inflation could however give some solace to the ECB, even though underlying inflation remains below where the ECB would like it to be. The unemployment rate held steady in June at a downwardly revised 8.3%, but there was a slight increase in the number of unemployed persons, which to some extent fits well with the more moderate growth picture. We still expect unemployment to stay on a downward trajectory for the remainder of the year.


Source: Macrobond

Disclaimer

Jes Asmussen

Chief Economist Denmark

Denmark and The Netherlands

jeas01@handelsbanken.dk

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