Barclays says the euro area continues to exhibit solid economic momentum, with Germany strengthening even as France shows weaker performance. The bank's strategists emphasize that a sharp rise in headline inflation for August reinforces European Central Bank communication that is consistent with an additional rate hike in September.
Detailed second-quarter GDP breakdowns for France and Germany indicate that growth across the euro area was predominantly supported by external demand, while domestic demand stayed muted. Barclays estimates euro area GDP growth of 0.45% quarter-on-quarter for Q2, a figure broadly in line with the flash estimate of 0.44%.
France's GDP for the quarter was revised down to 0.0% quarter-on-quarter from a preliminary 0.2%. The country saw a strong rebound in exports, which rose 2.9% and were helped by demand for aeronautical products. Nevertheless, a significant rundown in inventories and another drop in investment offset those export gains, leaving overall activity essentially unchanged.
Germany's Q2 growth was revised up to 0.3% from 0.2%, likewise led by external demand with exports up 2.0%. Manufacturing value added increased by 0.9%, helped by chemicals and electrical equipment, even as domestic demand remained subdued.
Survey evidence supports the view of improving conditions. The European Commission's Economic Sentiment Indicator increased by 1.3 points to 98.4, while Germany's Ifo business climate index rose 2.1 points to 88.8. Barclays notes that confidence strengthened across all major sectors, especially manufacturing, where firms reported a more optimistic outlook.
On the inflation front, national data from France and Spain point to a further rise in headline prices in August. France's year-on-year inflation rate climbed to 2.7% from 2.4%, and Spain's jumped to 4.5% from 3.9%. Barclays is tracking flash euro area HICP inflation at 3.39% year-on-year, marginally below its earlier 3.44% forecast.
Upstream price pressures also appear to be reasserting themselves. Spanish producer price inflation accelerated to 9.2% year-on-year in July, up from 7.0% in June, driven largely by electricity and gas prices. French producer price inflation rose to 4.3% from 3.6%.
ECB Executive Board member Isabel Schnabel signalled that rates may need to move higher, citing the prolonged Middle East conflict and the euro area's stronger-than-expected resilience as upside risks to inflation. She warned that energy-related price pressures "are becoming more persistent and increasingly extending beyond oil." The July meeting account from the ECB showed policymakers broadly expected at least one more rate increase, with some members willing to act at that meeting.
Barclays continues to anticipate a final 25 basis point hike in September, which would lift the deposit rate to a terminal level of 2.5%.
Implications and context
The combination of external demand driving growth, a modest improvement in manufacturing sentiment, and rising headline and producer prices creates a policy environment in which further ECB tightening is plausible. At the same time, persistent weakness in domestic demand and mixed country-level performance underline uneven momentum within the currency bloc.