FRANKFURT, July 30 - The economy of the 21 nations that use the euro expanded at a slightly stronger pace than forecasters had expected in the second quarter, according to Eurostat data released on Thursday. Gross domestic product rose 0.4% from the prior quarter, outperforming a Reuters poll projection of 0.2% and reversing a 0.2% contraction in the previous quarter.
On an annual basis the bloc's growth accelerated to 1.0% from 0.3% three months earlier, above the 0.5% year-on-year rate predicted in the Reuters survey. The euro area accounts for roughly 360 million people.
Eurostat and other sources cited a cluster of supportive forces for the outcome. Firms' investment in artificial intelligence reportedly surged across Europe, while government spending remained ample. Household consumption also held up better than gloomy forecasts had suggested. In addition, several temporary factors appear to have provided a boost to activity in the quarter.
Those positive contributors helped to offset headwinds that have continued to weigh on the bloc. The conflict in Iran and sharply higher energy costs were noted as drags on the economy. Even so, most forecasters still expect the euro area to record full-year growth of less than 1% in the current year, a pace that sits well below the region's much reduced potential.
Country-level results showed a broadly modest expansion in several large economies. Germany, France and Italy each recorded 0.2% growth on the quarter. Spain, which has frequently led the bloc in recent years, expanded by 0.7% - above expectations of 0.6% - while the Netherlands grew 0.4%, double the expected rate.
Industry, after a difficult year, performed better than many had feared despite elevated energy costs and may have contributed positively to overall growth - a contrast with earlier periods when industry was a persistent drag on the euro area economy.
An unusually large increase in Ireland's quarterly GDP - 3.9% - also lifted the euro area aggregate. That Irish growth was driven by multinational firms in the information technology and communications sectors that are located in Ireland for tax purposes. Irish GDP is highly volatile: it contracted by 7% in the previous quarter, and that volatility can swing the euro zone figure significantly. For that reason, some analysts prefer to exclude Ireland when assessing underlying trends.
Several analysts and forecasters cautioned that parts of the second-quarter strength could prove transitory. High energy costs and shortages of certain crude oil products may have hit Asian suppliers more severely, prompting purchasers to turn to European firms. Some orders may also have been pulled forward amid concerns that future shortages could be more acute, creating a temporary boost to activity.
Andrew Kenningham of Capital Economics said his team expects the euro-zone to "continue to weather the Iran energy shock reasonably well" and is modelling GDP growth of around 0.25% per quarter for the next year or so. He added that while there are downside risks if energy prices remain very high, those risks "may be smaller than widely assumed."
Looking ahead, a number of factors imply potential headwinds. The war's persistence keeps energy-price pressure in play, and higher fuel and transport costs are gradually filtering through to consumers via petrol, air fares and holiday prices. Inflation that erodes real incomes, combined with elevated interest rates set by the European Central Bank, could undermine household confidence and weigh on consumption.
Market watchers note that a tough third quarter cannot be ruled out: the temporary elements that supported Q2 may fade just as cost pressures continue to affect households and some sectors. Nonetheless, the quarter's outcome shows that Europe has pockets of resilience, including rising business investment in AI, steadier household spending than expected and a gradual ramp-up of planned government outlays in areas such as defence and infrastructure in some member states.
In sum, Eurostat's Q2 reading points to a modestly brighter patch in a still-subdued growth backdrop for the euro area. The data underline a mix of genuine upturns in investment and public spending alongside volatile and potentially short-lived boosts that complicate the outlook for the remainder of the year.