Eurostat data forecast a positive economic outlook for the European Union in July. Will they be accurate?
Inflation is expected to steadily decline in the European Union in the month of July, according to Eurostat data released on Monday. According to their estimates, headline consumer prices will decline to 5.3% annually, the lowest level since January 2022.
Food and tobacco are expected to have the highest annual inflation rate at 10.8% (down from 11.6% in June). They are followed by services at 5.6% (up from June’s 5.4%) and industrial goods at 5% (down from June’s 5.5%). Energy continues its downward trend, with prices -6.1% lower compared to last year, bringing overall inflation down.
In June, general inflation was 5.5% in the Eurozone, as much as core inflation. In July, on the other hand, core inflation remained stable at 5.5%.
Core inflation is a more realistic outlook on consumer prices: an index that excludes volatile goods like energy or food. The European Central Bank (as well as other central banks in developed nations) uses core inflation to rule on monetary policy.
The ECB raised interest rates by 0.25% again last week. ECB governor Christine Lagarde does not forecast a stabilization or reduction in rates, likely continuing monetary tightening into 2024.
Eurozone interest rates are 4.25%. This was the fastest and most incisive monetary tightening strategy in ECB history.
Current rates will have an impact on inflation in the following months. Lagarde hopes to tame inflation by June 2024, when markets hope a first cut arrives.
Sluggish growth
Further Eurostat estimates have Eurozone GDP growing by 0.3% in the Eurozone and remaining stable in the European Union. Compared to the same quarter last year, GDP increased by 0.6% in the Eurozone and 0.5% in the EU. If true, these estimates would mean a slight rebound from the earlier recession.
The Eurozone fell into a technical recession in June after revised economic data put GDP growth for the first quarter at -0.1%, following a similar decline in the previous quarter. A recession is defined as two consecutive quarters of GDP drop.
However, if Eurostat data is accurate, it might have been a temporary drawback, with the EU’s economy rebounding at the end of the year. It should be noted that GDP estimates are almost never accurate: the current technical recession was announced after revised 2022 data revealed a decline.
It will most likely depend on the extent of the Ukraine war and the capacity of gas reserves ahead of the winter. Europe can hardly afford another energy crisis with Russia. Fortunately, single European members increased imports of gas from other sources.
Finally, constant ECB rate increases will hamper Europe’s economic growth in the short term. According to Lagarde, however, they are necessary to fight inflation. But for how long will they be worth it?
