Euro zone economy grows but outlook far from rosy

By Francesco Canepa

(Reuters) -The euro zone’s economy grew slightly more than expected in the three months to June, data showed on Tuesday, but a mixed underlying picture and a string of pessimistic surveys cloud the outlook for the rest of the year.

The figures portray a bloc struggling to regain ground in global trade but continuing to enjoy a domestic rebound fuelled by higher real incomes and public spending.

Output in the 20 countries that share the euro increased by 0.3% in the second quarter of the year, Eurostat data showed, keeping up the pace from the previous quarter and just ahead of economists’ expectations.

Among large economies, France and Spain did better than expected, Italy held its ground, while German output unexpectedly contracted, strengthening fears about a lengthy crisis in a country that was for a decade Europe’s powerhouse.

Consumer confidence also remained negative in July, adding to a number of weak surveys in recent days.

The euro zone economy is quite like the water quality of the Seine: some days it may look okay but overall it’s poor enough to continuously worry about it,” ING economist Bert Colijn said, referring to the river in Paris where some Olympic events have been disrupted due to pollution levels.

The 0.3% quarterly increase in French GDP was a case in point.

While growth was a touch better than expected, this was partly due to the delivery of a single cruise ship boosting exports and offsetting flat consumer spending.

Still, it brought welcome relief to a country mired in political uncertainty and facing investor doubts about its growing debt.

“French growth could surprise on the upside this year and rise to around 1.2%,” Hadrien Camatte, an economist at Natixis, said. This is also good news for public finances, which would benefit from this growth pickup.

The Italian economy expanded 0.2% as inventories more than compensated for a drop in net exports, while Spain notched up a much stronger-than-expected 0.8%, in part attributed to public investments.

Germany lagged, with output falling by 0.1% due to lower investments in equipment and buildings in Europe’s largest economy.

Economists worry that rather than a short-lived dip, the data reflects Germany’s fundamental lack of competitiveness, partly due to the disruption of its business model based on cheap energy from Russia and vibrant trade with China.

“Companies are suffering from the long-standing erosion of German competitiveness, and consumers are laboring under the recent inflation-induced slump in purchasing power,” Joerg Kraemer, an economist at Commerzbank, said in a note.

Inflation also unexpectedly rose in Germany in July, to 2.6% from last month’s 2.5%, with a key measure of underlying price growth stuck at 2.9% for the second month in a row.

One cause for concern is the unchanged high core inflation,” Deutsche Bank economist Sebastian Becker said. “It is clear that the favorable, inflation-dampening effects on industrial goods excluding energy are still being more or less completely offset by the high upward pressure on service prices.”

Elsewhere, inflation slowed more than expected in Spain to 2.9% from 3.6% in June. Euro zone-wide data is due on Wednesday.

For now, lacklustre German growth data seemed to trump any worry about inflation.

Traders were largely sticking to their bets for two more interest rate cuts by the European Central Bank by the end of the year – in September and December.

(Additional reporting By Olivier Sorgho and Leigh Thomas in Paris, Belén Carreño in Madrid, Antonella Cinelli in Rome and Maria Martinez in BerlinEditing by Tomasz Janowski and Mark Potter)