Europe Smashes Estimates Despite Recession Fears: GDP Update

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Economic expansion in Europe beat expectations by a distance, putting it on a firmer footing as surging inflation and the risk of a Russian energy cutoff threaten to tip the continent into a recession.

Spain and Italy both reported second-quarter growth of 1% or more from the previous three months, buoyed by an influx of post-lockdown tourists. After a surprise contraction at the start of 2022, French output rose by 0.5% — more than the 0.2% median forecast in a Bloomberg survey of analysts. 

Highlighting the difficulties still ahead, however, inflation in France and Spain reached fresh records, exceeding economist predictions.

The data are part of a stack of numbers due Friday that culminates with gross domestic product from the 19-member euro area as a whole. Analysts see a small gain of 0.2%.

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Europe’s outlook for the coming months is extraordinarily uncertain. While the summer tourism season is handing southern countries a boost, projections for later on are being downgraded as the Kremlin’s energy threats, lingering supply snarls and record inflation depress demand and output.

The International Monetary Fund said this week that Germany, Europe’s No. 1 economy, is set to be the worst performer in the Group of Seven nations in 2022 due to the reliance of its outsized industrial sector on Russian natural gas.

Key Developments

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Italian GDP (10 a.m.)

Italy navigated rising energy costs and dwindling confidence to notch growth of 1% last quarter. The advance came thanks to domestic demand, with expansion in services and industry.

There are more reasons too for optimism in recent sentiment surveys. 

But the departure of Prime Minister Mario Draghi and the early elections his resignation triggered are casting a shadow over the economy’s prospects, with S&P Global Ratings downgrading its sovereign-debt outlook to stable from positive.

Draghi has spent almost 30 billion euros ($30.4 billion) to cushion businesses and households from inflation and higher energy costs, and another 14.3 billion euros of aid is in the works after the country recorded better-than-expected tax revenues in the first half.

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German Unemployment (9:55 a.m.)

German unemployment ticked up in July, jumping by 48,000 as refugees from the war in Ukraine joined the workforce, lifting the jobless rate to 5.4%. Economists had estimated an increase of 17,000.

Spanish GDP, inflation (9 a.m.)

The economy grew 1.1% in the second three months of 2022 — way above the 0.4% median estimate in a Bloomberg survey of analysts and faster than the previous quarter’s 0.2% increase.

Strong household consumption drove the surprise acceleration, with a further boost likely to come in the summer from an influx of foreign tourists, even as surging inflation dents consumption.

Prices jumped by a record 10.8% this month as a spike driven by electricity and heating costs spreads to food and services, separate data showed. The cost-of-living squeeze has prompted Prime Minister Pedro Sanchez to propose a windfall tax on profits at energy firms and banks, to fund fuel subsidies and provide other aid.

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The government has cut next year’s economic-growth forecast to 2.7%, though that’s still well above the International Monetary Fund 2% projection.

Austrian GDP, inflation (9 a.m.)

Austria reported a second straight quarter of growth after its winter lockdown, with its economy expanding 0.5% from the previous three months. Tourism provided the strongest growth impetus, even as household consumption dropped.

Output is likely to rise by 4.3% this year, according to the WiFo research institute, which compiled Friday’s GDP data.

Inflation, meanwhile, quickened to a record 9.2% from a year ago in July. Fuel remained the key driver, with the country’s biggest refinery offline for repairs following an accident.

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French inflation (8:45 a.m.)

July saw another all-time high for inflation in France — the sixth month in a row a new record has been set.

Prices jumped 6.8% compared with 6.5% in June, despite the government spending about 25 billion euros ($25.3 billion) to mitigate soaring energy costs. Economists had expected a 6.7% advance in the EU harmonized measure.

While the government’s measures — which include price caps for electricity and natural gas — have kept inflation cooler than in the rest of Europe, prices are still increasing at the fastest pace since the 1980s according to a national gauge. What’s more, the current “tariff shield” is set to expire at year-end.

Lithuanian GDP (8:00 a.m.)

Output in the most-populous of the three Baltic countries on the euro zone’s northeastern flank fell for the first time in 1 1/2 years.

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Rather than a blip, the 0.4% decline heralds the start of a recession, according to projections this month from the European Commission. GDP in neighboring Latvia plunged 1.4% last quarter, data released Thursday showed.

More so than elsewhere, inflation — running at an eye-watering 21% — is the main culprit in Lithuania, weighing heavily on household budgets. But proximity to the war in Ukraine is also fueling uncertainty that’s holding back investment.

Bloomberg Economics on France (7:55 a.m.)

Senior economist Maeva Cousin:

“Today’s reading confirms France has largely recovered from the shock of the pandemic, but the war in Ukraine and accompanying energy crisis are weighing heavily on the outlook. With inflation continuing to climb and surveys pointing to weak consumer and business confidence, growth is likely to fall back in the third quarter.”

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French GDP (7:30 a.m.)

The better-than-expected result was largely down to trade, which contributed 0.4 percentage point to last quarter’s growth as exports of services improved and imports of goods declined.

But some may focus on the deteriorating consumer backdrop.

A separate publication from statistics agency Insee showed consumer-spending growth slowed to 0.2% from the previous month in June as purchases of manufactured goods dropped sharply. Confidence among French households has been declining for seven straight months and hit its lowest level since 2013 in July.

Dutch inflation (6:30 a.m.)

Inflation in the Netherlands accelerated to 11.6% in July from 9.9% the previous month, according to preliminary data published by statistics office CBS. The cost of energy, which remains the main driver of headline inflation, jumped almost 70% from a year ago.

Coming Up (all times CET)

• Portuguese GDP, inflation (10:30 a.m.)
• Slovenian inflation (10:30 a.m.)
• Euro-zone GDP, inflation (11 a.m.)
• Italian inflation (11 a.m.)