Fra BNP Paribas:
The moderation in GDP growth from 0.4% q/q in Q1 to 0.3% q/q in Q2 was driven by both
underlying and temporary factors, suggesting some stabilisation in Q3 is likely.
The upward surprise in July core inflation meanwhile, supports our view that a gradual
upward trend in eurozone core inflation is emerging. This morning’s economic data were a mixed bag, as eurozone GDP disappointed expectations by moderating further compared with Q1, though only due to rounding, while core HICP inflation accelerated to 1.1% y/y.
At 0.3% q/q, Q2 GDP growth was slightly weaker than we had expected, even after accounting for the disappointing figure out of France last week. While national details are still scant (German data will be released only on 14 August), the impression from available data is that two forces are at play.
First, some of the one-off factors which dampened activity in Q1, such as industrial strikes, continued in Q2. At the same time, there is a more underlying slowdown, centred so far on external demand, as the past strengthening of the EUR and a moderation in global growth is taking its toll on net exports.
Conversely, domestic demand is doing better, still supported by solid job creation, high confidence and loose monetary conditions. We believe these trends will continue in Q3, with manufacturing likely to slow somewhat further and the more domestically-driven service sector activity generally set to remain more resilient.
As both the monetary and the fiscal stance are supportive, and some of the one-off factors
which acted as a drag on activity in Q2 are set to fade, we continue to expect growth to stabilise at a relatively solid and, more crucially, at an above-potential rate for the rest of the year.
Meanwhile, July’s flash core inflation rebounded to 1.1% y/y from 0.9% in June, led by increases in the price of services. July data are subject to a number of seasonal distortions, such as summer discounting, which this year seems to have been unusually strong in Germany – federal state CPI data suggest the strongest pace on record. Conversely, core goods inflation rose in Italy and France.
With the softening in Germany likely to be reversed in the coming months, there is scope
for a further acceleration in core HICP in the near-term – the July data, therefore, is the potential start of gradual upward trend that will lead eurozone core inflation to about 1.5% in Q4 in our view. Pipeline pressures have been brewing for a while, as companies have reached capacity constraints and the labour market has progressively tightened.
We expect this to continue and gradually filter down through the price formation chain as the output gap continues to narrow. Bottom line: While disappointing, GDP data should be taken at face value as it is still affected by temporary factors. Growth is undoubtedly weaker than at the turn of the year, but we continue to believe it will remain above potential for the rest of 2018.
Recent leading indicators support this view. As for inflation, while data tend to be noisy especially during the summer months, pipeline inflationary pressures are building, and we see today’s rebound as the possible start of an upward trend, albeit moderate, in underlying inflation.
