Eurozone output received a boost on Tuesday as a surprise upward revision in GDP growth figures showed a broadening recovery across the euro area. Growth was revised up for both the first and second quarters of the year. The Eurozone economy expanded by 0.5% q/q in the first quarter, versus initial estimates of 0.4%, and by 0.4% q/q in the second quarter, versus 0.3% in the first estimate. As a result of the revisions, euro area GDP stood 1.5% higher in the second quarter from a year earlier, against earlier estimates of 1.2%.
Italy was the main contributor to the higher GDP reading as its growth was revised up from 0.2% to 0.3% in the second quarter. Finland and Greece also saw upward revisions. The Greek economy expanded by 0.9% in the second quarter, while Finland was shown to have exited recession in the first quarter following the revisions.
Growth was driven by higher household expenditure, which increased by 0.4% in the second quarter. Exports also performed strongly on the back of a weaker euro, rising by 1.6% in the second quarter. But there was a fall in fixed capital formation, which dropped by 0.5% in the second quarter after growing by 1.4% in the first quarter.
The slightly stronger euro may put a break on the pace of the Eurozone’s export growth in the third quarter. But there’s little sign yet that the slowdown in China is having a significant impact on Eurozone exports. Data out today showed German exports rising by 2.4% in July m/m. Meanwhile, falling unemployment should help sustain the rise in household spending. Euro area unemployment fell to 10.9% in July – the lowest since March 2012. The latest PMI data also shows the growth momentum continuing into August.
The European Central Bank recently downgraded its growth forecasts for 2015-17 but growth now looks more likely to overshoot the target based on today’s revisions. A bigger concern for the ECB is the threat of deflation returning just months after prices turned positive again as the renewed slide in commodity prices drives input costs lower. ECB President Mario Draghi strongly hinted at further monetary stimulus if the recent market volatility and slowdown in China has a major impact on the Eurozone inflation outlook.
The euro was little impacted by the GDP numbers as it extended its slide after risk sentiment returned to the markets. But it attempted a recovery in afternoon European trading. The single currency climbed to 1.1188 against the dollar, after hitting a low of 1.1152 earlier in the European session. It also rose against the pound, recovering to 0.7271 from an earlier low of 0.7241, and was higher at 134.17 against the yen.