Euro zone returns to growth in second quarter as inflation falls

Euro zone inflation fell in line with expectations to 5.3 per cent in July after the single currency bloc returned to growth in the second quarter.

Eurostat, the EU’s statistical office, said inflation in the 20-country single currency bloc was down from 5.5 per cent in June. But core inflation, which excludes energy and food prices to give a clearer sign of underlying price pressures, was unchanged at 5.5 per cent. This was a setback for the European Central Bank (ECB), which raised interest rates for the ninth consecutive time last week and has said it will keep doing so until underlying price pressures are clearly falling towards its 2 per cent target.

While goods inflation is falling as demand for goods moderates, supply chain problems fade and energy costs fall, services inflation continues to be a problem. The latest Eurostat figures show services inflation continues to trend upwards, rising from 5.4 per cent in June to 5.6 per cent in July. This is being pushed by stronger wage growth, a reflection of tight labour markets and workers demanding higher wages to compensate for cost-of-living increases.

ECB policymakers insist they will keep interest rates high until core inflation starts coming down. The bank’s chief economist, Philip Lane, recently argued that higher levels of wage growth were not putting undue pressure on prices and that energy disinflation would eventually moderate core inflation.

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The latest Eurostat figures show Irish inflation, as measured by the harmonised indices of consumer prices (HICP), fell to 4.6 per cent in July, down from 4.8 per cent previously.

Hopes of a soft landing for the euro zone economy were bolstered by separate figures from Eurostat showing the euro zone economy rebounded with growth of 0.3 per cent in the second quarter, despite the ECB’s unprecedented rise in borrowing costs in the past year.

Ireland was highlighted as having the strongest level of growth in GDP (gross domestic product) terms at 3.3 per cent, 10 times the euro area average, driven by increases in the multinational-dominated sectors such as the pharma-led industry sector and the information and the technology sector.

GDP here was estimated to have increased 2.8 per cent compared with the same quarter in 2022, which again was the highest of any EU or euro area member.

“The growth rates compared to the same quarter of the previous year were positive for seven countries, with the highest values observed for Ireland (+2.8 per cent), Portugal (+2.3 per cent) and Spain (+1.8 per cent). The highest declines were recorded for Sweden (-2.4 per cent), Czechia (-0.6 per cent) and Latvia (-0.5 per cent).

GDP is a notoriously unreliable measure of economic activity here as it is warped by the multinational actions and payments.

The strong second-quarter growth number here follows a 2.8 per cent contraction in the first quarter of 2023 and a 0.1 per cent decline in the final quarter of last year, which meant that the Irish economy briefly entered a technical recession. – Copyright The Financial Times Limited 2023