Euro Area Economic Forecast

Sequential GDP growth for Q2 was revised down to 0.1% from 0.3%, mainly due to downward revisions for Italy and Ireland. Consumer spending flatlined and exports swung to contraction in Q2, while fixed investment growth decelerated. Available data suggests the economy’s ‘soft patch’ has extended into Q3 amid higher interest rates and sticky inflation. The industrial sector remains mired in recession, as shown by July’s output drop and contractionary PMI readings in July-August—dragged down by Germany’s weakness. Moreover, economic sentiment deteriorated in July-August. On top of this, the first contraction in money supply in 13 years in July points to feeble dynamics, while negative data on housing construction in the same month completes the downbeat picture. More positively, the robust performance of the tourism industry in Mediterranean countries is providing some support.

Harmonized inflation fell to 5.2% in August from 5.3% in July. Prices for services rose at a softer rate, while energy prices declined at a slower pace. Inflation should decline from its current level during the rest of the year and next amid elevated interest rates and subdued economic growth. A wage-price spiral and commodity price spikes are upside risks.