Economy extends recession, slides at a softer rate in the second quarter

GDP slid at a milder rate of 2.9% year on year in the second quarter, a softer contraction than the 3.7% one tallied in the first quarter. This figure was a slight improvement from the flash estimate of a 3.2% decline. The milder fall was due to a less severe downturn in the external sector and improved public spending. On the domestic front, weaker household spending and investment drove the continued deterioration. Private consumption contracted 3.3% in Q2 (Q1: -1.1% yoy), marking the steepest decline in three years. The downturn came despite softening inflation in the quarter and was likely exacerbated by higher interest rates in the Eurozone. Likewise, fixed investment contracted 18.7% in Q2 (Q1: -7.1% yoy), marking the worst result since Q1 2022. More positively, public consumption sped up to a 1.8% increase in Q2 (Q1: +0.3% yoy), which prevented a larger loss of momentum domestically. Meanwhile, a downbeat external panorama—particularly in the Euro area—continued to weigh on trade: The decline in exports of goods and services was steady at Q1’s 6.0% contraction in Q2. Meanwhile, imports of goods and services declined at a more pronounced pace of 9.1% in Q2 (Q1: -4.9% yoy), dampened by weakening domestic demand. On a seasonally adjusted quarter-on-quarter basis, GDP dropped 0.2% in Q2 from the previous quarter's 0.7% decrease. Q2's reading marked the best result since Q1 2022.

Looking ahead, our panel sees the economy exiting its six-quarter-long recession in Q3. That said, annual growth prospects remain precarious against a backdrop of tighter monetary conditions, downbeat activity among major trading partners and lackluster domestic demand. Price spikes for energy later this year and additional spillovers from the war in Ukraine are key factors to watch.

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