Euro-Area Economy Is All About Domestic Growth as Exports Stall

(Bloomberg) --

Consumption and investment drove economic growth in the second quarter as exporters struggled with weakening demand.

A detailed breakdown of the 19-nation region’s second-quarter performance confirms what European Central Bank officials have stressed for the past few months: Domestic demand remains solid thanks to a robust labor market, while manufacturers are suffering badly from a U.S.-China trade war and assorted other uncertainties.

Euro-Area Economy Is All About Domestic Growth as Exports Stall

Private consumption, government spending and investment added 0.1 percentage point each to economic growth, while net trade was a drag. Employment growth slowed to 0.2% in the second quarter.

Looking at individual sectors, industry was the only one to register a decline from the previous three months.

Data2Q1Q
GDP0.2%0.4%
Household spending0.2%0.4%
Government spending0.3%0.4%
Gross fixed capital formation0.5%0.2%
Exports0.0%0.9%
Imports0.2%0.4%

Strong domestic fundamentals were behind ECB President Mario Draghi’s comments in July that “it’s difficult to be gloomy” on the economy, even as external risks pile up. There’s still no end in sight to trade tensions, global growth is slowing, and the risk of a disorderly U.K. departure from the European Union is on the rise.

Lately, signs have increased that the economy’s resilience is being tested, with services providers close to manufacturing starting to experience disruptions. While orders in the sector continued to increase in August, they did so at the weakest pace in three months, and backlogs declined for the first time since March.

ECB officials meet next week to set the course for monetary policy. After Draghi committed to taking all necessary steps, and some officials urged for a big intervention, expectations among analysts and investors are running high.

More than 80% of economists surveyed by Bloomberg predict an announcement of more asset purchases. They see the ECB’s deposit rate being reduced by 10 basis points in both September and December.

Some central bankers have pushed back, arguing the outlook doesn’t warrant a renewal of quantitative easing, signaling the debate next week could be particularly fraught at a high-stakes time for the euro-area economy.

©2019 Bloomberg L.P.

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