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Eurozone GDP Growth Rises 0.6 Percent in Q2

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Written By: Adrian Moore – Forex Focus

GDP growth in line with expectations; euro slips versus the dollar and pound sterling. 

The seasonally adjusted second-quarter 2017 gross domestic product (GDP) growth in the eurozone, or the 19-member euro area, rose at a related pace of 0.6 percent. Compared to the same period a year earlier, the seasonally adjusted growth numbers in the euro area expanded at 2.1 percent, and 2.2 percent in EU28. The numbers are in line with market expectations after the combined economy grew at a seasonally adjusted annual pace of 1.9 percent in the 12-month period and 0.5 percent quarter-over-quarter earlier this year. (The eurozone, or euro area, is comprised of 19 countries that have adopted the euro as their national currency, while the other nine countries in the EU28 are part of the European Union but continue to use their own national currencies.)

Looking at the second-quarter GDP growth figures from individual countries in the European Union that have already announced their key data so far, Spain was the only country that reported an expansion in growth, with the economy expanding at 0.9 percent compared to 0.8 in the previous quarter; while growth figures from France and Austria remained unchanged in the second quarter at 0.5 and 0.8 percent respectively, and Lithuania, Belgium and Latvia reported slower growth, with the Lithuanian economy slowing down sharply in the second quarter.

GDP numbers in the eurozone are published by Eurostat, the statistical arm of the European Union. However, the agency did not mention the key components that led to the phenomenal economic growth in the union. The following graph illustrates the quarter-over-quarter GDP growth figures of EU countries that have already announced their numbers.

Source: EUROSTAT

The second-quarter GDP growth numbers reflect the robust performance in the eurozone economy since the first quarter of 2016, while the annual growth figures at 2.1 percent are the strongest since 2011, as the number of people finding employment rose moderately. With crude-oil prices remaining stable in the $40-50 per barrel range, lower consumer inflation led to a rise in retail spending, thereby driving the economy. With deposit rates in the euro area currently in the negative zone at -0.4 percent, and the European Central Bank (ECB) not willing to sidestep from its monetary policy anytime soon, growth figures in most of the economies representing the eurozone appear to be heading in only in one direction: north!

The following chart illustrates the quarter-over-quarter performance of the eurozone economy from 2016.

Source: EUROSTAT

With the US economy accelerating at 2.6 percent in the second quarter compared to a year earlier, and the euro area economy expanding at its quickest pace in six years, the United Kingdom is the only major country that reported lower growth thus far. The UK economy expanded at an extremely slow pace in the first half of 2017, rising 0.3 percent in second quarter 2017, slightly better than the 0.2 percent growth numbers reported in the first quarter. The aftermath of the Brexit vote led to a steep fall in the pound sterling, adding to import costs and pushing up retail inflation. More information on the state of the UK economy emerged after the Bank of England (BoE) concluded its monetary policy meeting on August 3.

For example, earlier in the month, the euro came in for fresh selling versus the greenback, pulling back after testing 1.1845 highs to end the session near 1.1800. The pair have been trading near two-and-a-half-year highs, up more than 12 percent this year. Against the pound sterling, the euro was down about 0.3 percent on one trading  day, settling at 0.8933, near its eight-month high.

The preliminary GDP reading from the eurozone is most likely to be revised as more countries report their GDP growth records in the coming days. Some of the larger economies, such as Germany and Italy, have yet to announce their second-quarter GDP numbers, which could alter the overall GDP growth figure if the numbers do not come in as projected. But a look at some of the key eurozone data from April to June point to firm growth in most countries within the European Union, with signs of an overall healthy economy.

At its monetary policy meeting in July, the European Central Bank left key interest rates on refinancing, marginal lending and deposits unchanged. In its press release, the central bank maintained that it intends to leave the rates as they stand for an extended period and continue with the monthly asset purchase at the rate of EUR 60 billion, at least until December of this year, leaving the door open for further discussions in the next meeting scheduled for September.

With the eurozone economy growing at multi-year highs in the first half of the year and as it looks to expand further going into the second half, will the ECB change its assessment of the current economic conditions and surprise the markets in September? It very well could.

 

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