Eurozone Beats Slowdown Expectations

Eurozone growth was better than expected in the second quarter, flash estimates showed late Tuesday, in a sign that the negative effects of global trade tensions might be seen only later in the year.

However, while the economy expanded 0.4% in the second quarter, above forecasts of 0.3% growth, industrial output in the 19-country currency bloc fell sharply in June driven by a collapse in machinery and equipment investment, European statistics office Eurostat said, Reuters reported.

Eurostat’s flash growth estimate was also higher than its previous estimate of 0.3% growth. The agency also revised up the year-on-year growth to 2.2% from its previous 2.1% estimate.

The revised monthly figure, if confirmed by final data to be released on September 7, would show that the bloc has maintained a 0.4% growth pace in the first two quarters of the year, confounding initial fears of a slowdown in Q2.

The better-than-expected estimate could increase the European Central Bank’s confidence in winding down its asset purchase program, but the growth outlook remains unclear, given the industrial output data.

Eurostat’s upward revision came after Germany, the bloc’s largest economy, recorded a better-than-expected 0.5% expansion in Q2, driven by consumption and state spending that could signal the beginning of a shift from Germany’s export-led economic model.

But it said the bloc’s industrial output fell by 0.7% in June on the month, recording a larger drop than expected by economists polled by Reuters who had forecast a 0.4% fall.

Germany’s monthly output was down by 0.6% in June after a 2.4% growth in May, Eurostat said.

“For the months ahead, production seems to be limited by concerns about the global economy on the one hand and capacity constraints on the other,” Bert Colijn, a senior economist at ING bank said in a note to clients, predicting that the eurozone’s current growth rate would remain unchanged this year. He added that “2018 has been somewhat of a disappointment so far.” The eurozone’s highly volatile industrial production had expanded by 1.4% in May, Eurostat said, revising up its previous estimate of 1.3% growth.

The production plunge was mostly driven by a 2.9% drop in the output of capital goods, like machinery, in a sign that firms may be preparing for slower growth in the coming months.