Euro zone Q2 GDP jumps on households, investment

Euro zone Q2 GDP jumps on households, investment

Brussels: Higher household spending and investment drove euro zone growth in the second quarter of 2010, while first quarter growth was also stronger than thought, but the expansion should slow in the second half of the year.

European Union statistics agency Eurostat confirmed on Thursday that gross domestic product in the 16-nation currency area grew 1.0% quarter-on-quarter in the April-June period, the fastest pace in four years, after an upwardly revised 0.3% in the first quarter.

“Today’s data signalled that the euro zone recovery strengthened in the second quarter of 2010," said Clemente de Lucia, economist at BNP Paribas.

Growth was driven by very strong figures in Germany, the currency area’s biggest economy. Crisis-hit Greece was the only euro zone country to suffer contraction, although figures for Ireland were not available.

“Activity will probably lose momentum in the second half of the year," de Lucia said, pointing to a likely deceleration of growth in Germany, where activity largely relies on exports. Major export markets like China and the US are slowing down.

Year-on-year, the euro zone economy expanded 1.9% in the second quarter, rather than the previously estimated 1.7%, and grew 0.8% in the first quarter rather than the earlier reported 0.6%.

In the US, the economy grew 0.4% in the same period and growth was 0.1% in Japan.

Eurostat said quarter-on-quarter household consumption contributed 0.3 percentage points to the overall growth figure, investment another 0.3 points, government spending 0.1 points and investories 0.2 points. Net trade added 0.1 points.

“The second quarter’s rise in household spending will have been partly down to households in parts of the periphery bringing forward spending in advance of July’s VAT hikes," said Ben May, economist at Capital Economics.

“Meanwhile, investment will have been boosted by a large weather-related rebound in construction activity," he said.

Second half slowdown

With some of the factors that boosted the second quarter petering out in the next three months, and slower external demand and fiscal austrity measures to win back market confidence in euro zone public finances also restraining activity, economists expect growth to slow later this year.

Some analysts said quarterly expansion could be 0.4-0.6% in the July-September period and even less in the last three months of the year, but noted a dip into contraction was unlikely.

“This torrid pace of GDP growth is not sustainable, and all demand components are going to show considerably less momentum going forward," said Marco Valli, economist at Unicredit.

“In our projections... the 2010 average should be 1.6%, while for 2011 we see 1.3%. We expect the Eureopan Central Bank to come up with similar numbers today," Valli said.

The European Central Bank is expected to extend its liquidity safety-net on Thursday, delaying its exit from crisis support as policymakers confront a lopsided euro zone recovery and vulnerable banks in perimeter countries. It will also issue new economic forecasts.

Separately, Eurostat said euro zone industrial producer prices increased by 0.2% month-on-month in August for an annual gain of 4%, boosted mainly by costs of energy, which were low in the same period of 2009.