Eurozone industrial sector rebounds, giving growth a boost to end weak quarter
Data from Eurostat has shown that the eurozone’s industrial sector rebounded in June, providing a small boost to overall growth and ending an otherwise weak quarter on a positive note. Industrial production in the 20 nations sharing the euro expanded by 0.5% on the month, surpassing expectations for a 0.2% rise. Meanwhile, gross domestic product (GDP) remained unchanged at 0.3% in the second quarter, according to preliminary data from the EU’s statistics agency.
However, underlying growth may have been weaker due to distorted data caused by a 3.3% jump in Irish GDP. This jump is primarily driven by the oversized impact of large foreign companies based in Ireland for tax purposes. Despite this, the eurozone economy has experienced stagnation over the past three quarters, primarily due to a manufacturing recession and high costs for food and energy. The services and employment sectors have provided the few bright spots.
Recovery is not yet in sight, as leading indicators suggest stagnation in the coming quarters. This is partly due to the European Central Bank’s cautious approach to raising borrowing costs further, given the decades-high interest rates. The bank is expected to proceed with extra care in order to avoid hindering economic growth.
On a positive note, employment continues to expand, indicating a strong labour market. In fact, unemployment is currently at an all-time low. Employment expanded by 0.2% in the quarter, indicating that the labour market remains robust. The Ifo institute reports that 43% of German firms are facing a shortage of qualified workers, which is an apparent anomaly given weak growth should typically lead to higher unemployment. Economists suggest that firms, enjoying some of their best margins in years, are hoarding labour due to concerns that re-hiring workers would be difficult once the upturn begins.
Economists predict that the eurozone will experience small growth in the coming quarters. This forecast is supported by expectations of a strong tourism season and continued demand for workers, particularly in the services sector. Interest rates are not expected to increase significantly, with the current debate focusing on whether one final small rate hike is necessary to control inflation.