Euro-area growth data for the second quarter was predictably underwhelming.
There were no “green shoots” to speak of and the latest read on the bloc’s struggling economy ostensibly bolsters the case for more easing from the ECB.
On the whole, the euro-area grew an anemic 0.2% in Q2, half the 0.4% from the first quarter. The YoY rate is now just 1.1%, the most sluggish in half a decade.
Political uncertainty in Spain is starting to weigh in the bloc’s fourth largest economy, which had been a bright spot. Still, at 0.5%, Spain is growing at better than twice the rate of the broader euro-area. The data for France was a disappointment on Tuesday.
(Note: Q2 is estimated for Germany)
In Italy, growth flatlined in Q2, which was actually a relief. Economists expected a 0.1% contraction, which would have put the country on track for a double-dip recession as Matteo Salvini ponders when to pull the plug on the fractious coalition with Five Star.
Inflation continues to decelerate. The flash read for July was 1.1%, the lowest in more than a year, while core fell below 1% to 0.9%, missing estimates.
Again, all of this will doubtlessly be trotted out as evidence in support of a new easing package from the ECB to be unveiled in September. There’s little here to suggest the malaise is likely to clear any time soon.
Although you could argue that with the US and China locked in a seemingly intractable stalemate, the Trump administration might be prepared to strike a more conciliatory tone with Europe on prospective auto tariffs and the Airbus subsidy issue (in an effort to avoid fighting a multi-front trade war), the US president’s rhetoric around purported currency “manipulation” by the ECB doesn’t bode particularly well.
And therein lies the rub – in order to combat the downturn and ward off “Japanification”, the ECB will need to act in the absence of a bloc-wide fiscal push (and Germany has shown no signs of budging on that). The more aggressive the ECB is, the more irritated Trump will become. The angrier he is, the greater the chances of a US-EU trade war, and everything that comes with it.
