Economic activity in the eurozone remains robust, with momentum strengthening in Germany and France lagging, according to a Barclays assessment.
According to the bank's strategists, with headline inflation poised to rise sharply in August, the European Central Bank's (ECB) rhetoric points to the possibility of another rate hike in September.
Second-quarter GDP data for France and Germany showed that growth in the eurozone was driven primarily by external demand, while domestic demand remained subdued. Barclays estimates that eurozone GDP growth was 0.45% quarter-on-quarter in the second quarter, broadly in line with the preliminary estimate of 0.44%.
French GDP growth was revised downwards to 0.0% quarter-on-quarter, compared to the preliminary estimate of 0.2%. Exports rebounded sharply, rising 2.9%, driven by demand for aviation products. However, a significant inventory drawdown and a further decline in investment offset this gain, leaving activity virtually unchanged.
In Germany, second-quarter GDP growth was revised upward to 0.3% from 0.2%, also driven by external demand: exports rose 2.0%. Value added in manufacturing increased by 0.9%, supported by the chemical and electrical equipment industries, while domestic demand remained subdued.
Survey data confirmed the improved situation. The European Commission's Economic Sentiment Indicator rose 1.3 points to 98.4, and Germany's Ifo Business Climate Index rose 2.1 points to 88.8. According to Barclays, confidence increased across all key sectors, "particularly in manufacturing, where companies reported a more optimistic outlook."
On the inflation front, national data from France and Spain indicated a further acceleration in consumer price growth in August. In France, inflation rose to 2.7% year-on-year from 2.4%, while in Spain it rose sharply to 4.5% from 3.9%. According to Barclays, the preliminary HICP inflation rate for the eurozone is 3.39% year-on-year, slightly below the initial forecast of 3.44%.
Producer price data also point to renewed pressure at the beginning of the production chain. Producer price inflation in Spain accelerated to 9.2% year-on-year in July, up from 7.0% in June, driven largely by electricity and gas prices, while French PPI rose to 4.3% from 3.6%. ECB Executive Board member Isabel Schnabel said in an interview with Bloomberg that rates may need to be raised further, citing the protracted conflict in the Middle East and the eurozone's stronger-than-expected resilience as factors increasing inflation risks. She warned that energy-related inflationary pressures are "becoming increasingly persistent and increasingly spilling over beyond the oil market."
The minutes of the ECB's July meeting showed that policymakers generally expected at least one more rate hike, with some members prepared to act already at that meeting. Barclays still expects a final 25 basis point hike in September, which would bring the deposit rate to its terminal level of 2.5%.