Hopes for the Olympics and the ECB
Europe is gradually accelerating its recovery, which was previously hindered by the fight against the consequences of COVID-19. The Olympics are somewhat helping Europeans in this regard. Although the Games are being held in France, they provide an excuse to spend a bit more money. Consequently, things are gradually improving. However, a recent decision by the European Central Bank has somewhat slowed down the recovery rate. The good news is that prices are slowing down after last year’s rally.
In July, the ECB left the main refinancing rate at 4.25%, the marginal lending rate at 4.50%, and the deposit rate at 3.75%. This followed a 0.25 percentage point cut in June. This decision, like in June, is unlikely to have significantly impacted the second quarter’s economic results, which have only just become available, and are still in preliminary form, not final.
ECB President Christine Lagarde described the economic growth data from France, Germany, and Spain as "quite encouraging" and expressed hope that the European economy would continue to recover. "The GDP data for France, Germany, and Spain for the second quarter are quite encouraging... They support our GDP growth scenario of 0.9% in the eurozone this year," she said in an interview with Le Figaro.
What is happening in each of the largest EU economies? Things are not going equally well everywhere.
According to Eurostat data, in the second quarter of 2024, seasonally adjusted GDP grew by 0.3% in both the eurozone and the EU compared to the previous quarter. In the first quarter of 2024, GDP also grew by 0.3% in both the EU and the eurozone.
Of course, these are preliminary GDP estimates, they are not complete and will be revised. Even now, data for some countries are not available yet. But for the 11 countries for which figures are already available, annual growth rates were positive for eight countries and negative for three.
Among the EU member states for which data for the second quarter of 2024 are already available, Ireland (+1.2%) had the best growth result compared to the previous quarter. Next are Lithuania (+0.9%) and Spain (+0.8%). In France (0.3%) and Italy (0.2%), growth was slower. Germany (-0.1%) showed a negative result. The decline was slightly greater in Hungary (-0.2%), which suffered due to excessively close economic ties with China. The largest declines were in Sweden (-0.8%) and Latvia (-1.1%). Here, all growth rates refer to the change in GDP for the second quarter of 2024 compared to the first quarter of the same year.
How did Spain manage to grow so quickly? Most likely, it is due to the fact that inflation in this country slowed down significantly more than expected, thanks to a drop in energy and food prices. According to official data, inflation in Spain slowed to 2.9% in July. Although overall in the eurozone inflation was lower - 2.5% annually, even in the European Union inflation in June was also lower and amounted to 2.6%. But most importantly, Spain has been recovering at a rate of +0.8% for the second consecutive quarter. Spain's acceleration began in the fourth quarter of 2023, when growth rates were 0.7%. It is worth considering that last year this country suffered severely due to drought.
France shows more moderate economic growth rates quarter to quarter – plus 0.3% in the second and first quarters after plus 0.4% in the fourth quarter of 2023.
It is very likely that the French economy was helped by the Olympic Games, not only the event itself and the money spent by numerous tourists but also the preparation period.
ECB President Christine Lagarde told CNBC in Paris that France's economic growth definitely owes to the Olympics, but the full extent of the impact will be seen somewhat later, obviously referring to data for the three quarters of the current year, which will be available only in October.
Lagarde sees three channels of impact from the Games on the French economy: the construction and renovation of various facilities over the past three to four years, the influx of visitors to the competitions, and the restoration of confidence due to the powerful event, hence a change in consumer and investor sentiment.
And what about Germany, the largest economy in the EU?
Analysts polled by Reuters had forecast quarter-on-quarter growth of 0.1% in the second quarter in adjusted terms after 0.2% economic growth in the first quarter. But it turned out otherwise - minus 0.1%.
Moreover, according to preliminary data from the Federal Statistical Office, released on 30 July, this figure rose to 2.6% in July. This is also contrary to analysts' expectations, who expected inflation of 2.5%, as in June. The problems seem to be related to excessively high wage growth rates in the services sector. Although those employed in this sector might disagree.
What can we expect from the German economy in the future? It is possible that some acceleration will be provided by the deployment of arms production, which began to receive real attention this year due to the aggressive war being waged by Russia in Ukraine. In any case, the third quarter should be decisive for the German economy in its fight against the extremely dangerous combination of economic slowdown with increased inflation.
And if inflation in August is not too high, in the autumn the ECB may once again lower its key rates, which will further accelerate the recovery of the eurozone economies, primarily Germany's.