Morning Market Brief: Tuesday, August 1, 2023

European economy returns to expansion?

Eurostat released flash estimates on two key economic variables yesterday. The preliminary estimates showed the European economy expanded in the second quarter of 2023, while inflation remained elevated in July, despite softening compared to the previous month. The results could point to more interest-rate increases by the European Central Bank (ECB).?

• Gross domestic product in Europe expanded by 0.3% in the second quarter of 2023 over the previous quarter. Europe’s economy has returned to growth after a revised 0.0% reading in the first quarter and declining in the last quarter of 2022.
• Among Europe’s largest economies, Germany’s economy was relatively flat, while Spain and France posted expansions in the second quarter.
• The European economy benefited from better consumer spending. Still, spending was relatively flat as consumers grappled with high prices and rising borrowing costs.
• Data showed inflation softened slightly to 5.3% year-over-year in July, down from the 5.5% inflation rate in June. Core inflation pressures persisted in July, remaining at 5.5% year-over-year.
• Higher growth and still elevated inflation could have the ECB raising interest rates further at upcoming meetings. At its last meeting, the ECB indicated it would keep an open mind about its upcoming rate decision, with a rate increase or a pause on the table.

Despite the increase, there is still much uncertainty about the outlook for Europe’s economy. Manufacturing continues to contract, while services sector activity has slowed considerably in recent months. Growth in Europe has differed from that in Canada and the U.S., which recently posted moderate growth rates. Europe’s equity markets are heavily concentrated in more cyclical stocks. During down periods, volatility might be high. However, times of improving economic conditions could help boost European stock markets.

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