By Balazs Koranyi
FRANKFURT, July 30 (Reuters) – The euro zone economy grew faster than expected last quarter as surging investment in AI, ample government spending and several one-off factors more than offset a drag from high energy costs and the war in Iran.
The economy of the 21 nations sharing the euro currency expanded by 0.4% on the quarter, above modest expectations for 0.2% in a Reuters poll as many of the bloc’s biggest nations outperformed forecasts, data from Eurostat showed on Thursday.
Compared with the same quarter last year, growth in the bloc of 360 million people accelerated to 1.0%, above expectations for 0.5%, as some earlier growth figures were also revised up.
The second quarter was initially expected to be the start of a rebound after a difficult and turbulent year for Europe. But soaring energy costs sapped much of the momentum and most forecasters now see full-year growth of less than 1% this year, below the bloc’s already much reduced potential.
Although growth was better than forecast in the quarter, it remains weak and stands in stark contrast to the continuing boom in the U.S., which will likely see its economy grow more than 2% this year, fuelled in part by oversized and potentially unsustainable private sector spending on AI.
Still, there appear to be some bright spots for the euro area and the bloc is showing the sort of resilience seen in previous downturns, including the COVID-19 pandemic and after Russia’s invasion of Ukraine.
Adding to the resilience narrative, unemployment held steady at 6.3% in June, defying expectations for labour market softening. A key economic sentiment indicator, also published on Thursday, meanwhile rose more than expected on better industrial and services sentiment.
Business investment in AI has been soaring in Europe as well, household consumption has held up against gloomy expectations, and Germany’s government is slowly but surely ramping up its long-promised spending on defence and infrastructure.
Industry, in the doldrums for years, has also held up against high energy costs surprisingly well and may have added to growth, unlike in previous years, when it was a persistent drag.
Germany, the world’s third-biggest economy, France and Italy all expanded by 0.2% on the quarter, while Spain, the bloc’s outperformer for years now, grew by 0.7%, above expectations for 0.6%. The Netherlands meanwhile expanded by 0.4%, twice the expected rate.
GROWTH BOOSTERS MAY NOT LAST
“However, the recent escalation of the Middle East war means that more time is likely to pass before a final agreement is reached between the U.S. and Iran,” Commerzbank economist Jörg Krämer said. “This is likely to dampen the economic recovery in the second half of the year.”
Still, strong figures on Thursday suggest Germany could grow by 1.0% this year instead of the 0.6% seen earlier, Krämer added.
Others meanwhile point out that the economy, including the bloc’s vast industry, benefited from one-offs that may not last.
High energy costs and shortages of crude products may have affected Asian firms more, forcing buyers to turn to Europe, while some orders may also have been brought forward on fears that product shortages could become more acute later in the year.
The bloc also got a boost from 3.9% quarterly growth in Ireland, which was driven by multinational firms in IT and communication that are located there for tax purposes.
Irish GDP, though small, is so volatile — it contracted by 7% last quarter — that it can swing the euro zone number significantly and some now prefer to exclude it when studying underlying trends.
Industry’s boost and the quick Irish expansion may not last, suggesting the third quarter will be tough as the war keeps dragging on and high energy costs are slowly filtering down to consumers via petrol, airfare and holiday prices.
Household confidence may weaken as inflation erodes real incomes and higher interest rates at the European Central Bank also put pressure on consumers.
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
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