Euro-Area Economy Left Struggling as Growth, Inflation Slow

(Bloomberg) --

Economic growth in the euro area slowed dramatically in the second quarter, the latest in a string of reports flagging deteriorating economic prospects that increase the chance of more European Central Bank stimulus.

Cooling momentum risks extending a phase of too-low inflation that's worrying policy makers. At their last meeting, ECB officials ordered staff to study everything from interest-rate cuts to asset purchases as they look at ways to prop up the economy.

The latest data showed the 19-nation region expanded 0.2% last quarter, down from 0.4% in the previous three months. That left year-on-year growth at 1.1%, its weakest in more than five years. Inflation slowed to 1.1% in July, the lowest since early 2018, and a gauge excluding volatile components such as food and energy was even weaker.

The reports confirm a trend observed in some of the region's largest economies. Growth slowed in France, Spain, Austria and Belgium and the economy stagnated in Italy.

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Concern about the state of the euro-area economy and expectations of ECB action have driven investors into the German bond market. The yield on the nation's 10-year debt is below minus 0.4 percent, the current level of the ECB's deposit rate.

Much of the slowdown engulfing Europe is linked to manufacturing and global trade tensions, with German industry hit particularly hard.

Germany's GDP figures aren't due until Aug. 14 -- though the euro-zone estimate normally includes some German data provided to Eurostat by the country's national statistics office. Separate figures on Wednesday showed a small increase in German jobless claims in July.

What Bloomberg's Economists Say

“With euro-area economic growth dropping below trend, the ECB risks getting further away from meeting its objectives. We expect growth to remain weak in the second half and see President Mario Draghi unveiling a big round of monetary stimulus in September.”

--Jamie Rush.
Read the EURO-AREA REACT

Companies there and across the region have issued profit warnings in recent weeks, pointing to trade tensions and weaker global growth. Deutsche Lufthansa reported the first loss for 2 1/2 years at its freight arm as it flew with the most empty space in a decade.

An imminent improvement isn't in sight. The U.S. and China concluded a new round of trade talks in Shanghai with little evidence of progress toward ending their year-long dispute. At the same time, corporate results in the Asian country are painting a dire picture, with some 40% of the more than 1,600 firms to give first-half guidance predicting a drop in earnings from a year earlier.

--With assistance from Harumi Ichikura and Kristian Siedenburg.

To contact the reporters on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.net;Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss

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