GDP grows at softest pace since Q1 2021 in the second quarter

GDP growth waned to 2.7% year on year in the second quarter, from 2.8% in the first quarter. Q2's reading marked the softest expansion since Q1 2021. Private consumption increased 2.3% in the second quarter, which was above the first quarter's 1.4% expansion, supported by falling inflation, robust wage growth and a tight labor market. Public consumption growth was the slowest since Q1 2022, expanding 0.3% (Q1: +2.2% yoy). Fixed investment growth fell to 3.2% in Q2, weighed on by weaker construction activity and marking the worst result since Q1 2022 (Q1: +3.9% yoy). Exports of goods and services plunged at the steepest rate in over two years, contracting 1.6% in the second quarter (Q1: +4.8% yoy) amid a bleaker external backdrop. In addition, imports of goods and services dropped at a steeper rate of 3.6% in Q2 (Q1: -0.8% yoy), marking the worst reading since Q4 2020. On a seasonally adjusted quarter-on-quarter basis, GDP growth eased to 1.1% in Q2, compared to the previous quarter's 1.3% expansion.

Heading into H2, our panel sees growth slowing slightly, but remaining elevated relative to its Euro area peers. Protracted economic weakness in the region is set to weigh on the external sector, while higher interest rates will weigh on domestic activity. Nonetheless, EU funds and a robust labor market will provide support. Alen Kovac, analyst at Erste Bank, commented on the outlook: “Following solid expansion in 1H23, 2H23 should still offer solid growth rates though with risks looking more balanced. On the domestic demand side, private consumption remains supported by strong labor market, resilient consumer sentiment and some consumer credit revival, with sticky inflation hurting the prospects to some extent. […] External demand brings more uncertainties as fairly weak EU growth outlook is getting more gloomy, hence weighing on the exports outlook.”

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