Euro area economic growth decelerates in Q2 2018, core inflation rises above expectations

The euro area economy expended at a softer rate in the second quarter. Nevertheless, the core rate of inflation came in a bit above expectations. The flash estimate of the currency bloc’s real GDP growth for the second quarter has affirmed that the economy’s growth momentum has eased significantly in the first half of this year.

The economic growth eased to a rise of 0.3 percent sequentially in the June quarter after having grown at a rate of 0.4 percent in the prior quarter. The real GDP growth rate was not even half as high as during 2017, when it had stayed stable at 0.7 percent, noted Commerzbank in a research report.

On a year-on-year basis, the economic growth decelerated to 2.1 percent in the second quarter from 2.8 percent at the end of 2017 and 2.5 percent recorded in the first quarter. Nevertheless, the latest confidence indicators have provided hope that the economic growth will stabilize in the second half of this year.

The service sector PMI, for instance, which has seen a solid correlation with economic growth in the past, was even slightly above the average for the second quarter in July. Therefore, the jobless rate, which stayed at 8.3 percent in June, should also continue to decline, stated Commerzbank.

Nevertheless, the headline consumer price figures came in unexpectedly high in July. The consumer price index rose a bit to 2.1 percent, which is mainly because of a rise in core inflation rate to 1.1 percent from 0.9 percent. This is seen as a fluctuation of the rate in its sideways corridor between 0.8 percent and 1.1 percent rather than the beginning of a sustained upward trend, as wage growth has been still quite subdued for this so far.

“However, in view of the continuing upswing and the expected further fall in the unemployment rate, wage growth should gradually accelerate and from spring 2019 the core inflation rate should also rise slowly, although we expect a weaker upswing than the ECB”, added Commerzbank.

At 16:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at 40.8798, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -55.6811. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex