Euro-Area Growth Slowed Before U.K. Vote Put Outlook at Risk

  • Growth eased to 0.3% in second quarter, down from 0.6%
  • Inflation in the region unexpectedly picked up to 0.2% in July

Euro-area growth slowed in line with economists’ projections in the second quarter, underpinning an assessment by the European Central Bank that patience is needed to judge what kind of damage Brexit will inflict on the 19-nation region.

Gross domestic product rose 0.3 percent in the three months to June, according to an initial estimate published by the European Union’s statistics office on Friday. That follows an expansion of 0.6 percent in the previous period. Separate data showed inflation unexpectedly accelerated to 0.2 percent in July, the strongest since January.

The data indicate that the region’s moderate recovery was fragile even before Britons voted to leave the EU, probably pushing the U.K. economy into recession and threatening to damp output in the euro area. European Central Bank President Mario Draghi said last week that visibility is low in the aftermath of Britain’s June 23 vote, though he remains ready to act in the months ahead should the separation hurt growth or delay the return of inflation to the institution’s goal.

“Nothing but a cooling of growth had to be expected,” said Joerg Zeuner, chief economist at Germany’s state-owned development bank KfW. “It is a different world since Brexit,” even if “the first business-climate indicators only suggest a modest hangover for the euro area.”

The euro rose slightly after the report and traded at $1.1097 at 11:12 a.m. Frankfurt time.

A Little Surprised

The French and Austrian economies stalled in the three months through June, and Spain’s expansion slowed to the weakest in six quarters. Growth in Germany, Europe’s biggest economy, probably cooled to 0.3 percent from 0.7 percent, economists forecast before data due Aug. 12. In Lithuania, GDP increased 0.1 percent.

“We were a little surprised on the upside, especially after the French economy surprised on the downside, which leads us to believe the German economy was stronger in the quarter,” said Johannes Mayr, senior economist at Bayerische Landesbank in Munich. “This number tells us the Brexit shock hit the euro zone in good shape and limits the downside risk for the coming quarters.”

While economists predict Britain will fall into a mild recession in the second half of the year, surveys suggest the impact of the referendum on the broader European economy remains muted. Euro-area economic confidence unexpectedly improved in July, the European Commission said on Thursday.

Brexit Impact

That could undermine arguments for the ECB to extend its bond-purchase program beyond March 2017 or tweak its terms. While Draghi previously told euro-area finance ministers that Brexit could cut half a percentage point from growth over three years, that calculation was based on an assumption of weaker trade that he cast doubt on at a July 22 press conference in Frankfurt.

“With Brexit, there’s the trade channel, but is it the most relevant?” he said. “One would rather think of confidence or financial-services channels.”

The euro-area economy expanded 1.6 percent in the second quarter from the previous year, Eurostat said in the report. Unemployment remained unchanged at 10.1 percent in June, with joblessness ranging from 4 percent in Malta to 19.9 percent in Spain, separate data show. Core inflation, which strips out volatile components such as food and energy, remained unchanged at 0.9 percent in July.

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