Eurozone Economy Accelerates in 2Q -- Update

By Paul Hannon, Tom Fairless and Giovanni Legorano Features Dow Jones Newswires

The eurozone's economy quickened in the second quarter, raising expectations the European Central Bank will begin to phase out its stimulus measures next year as the region emerges from the shadow of the past decade's financial crises.

Continue Reading Below

Gross domestic product in the 19-country euro currency zone grew by 0.6% in the three months to June, an annualized pace of 2.3% and a slight improvement from the 0.5% expansion in the first quarter.

The eurozone's recovery has been a boon this year for the global economy, partly offsetting weaker-than-expected U.S. growth. Entering 2017, most economists expected growth in Europe's economic heartland to slow in response to political uncertainty and rising oil prices.

"All in all, the eurozone economy has rounded out the first half of the year in a very healthy state and seems to be set up nicely for continued firm growth for the rest of 2017," said Bert Colijn, an economist at ING Bank.

The region has taken longer than other major economies to shake off the legacy of the global financial crisis, and the depth and length of the postcrisis funk even raised severe doubts about the survival of its currency union.

Some crisis-era effects linger, including high unemployment in Southern Europe, lack of growth in laggards such as Italy and Greece, and popular discontent with political elites in many countries. But improving growth is dispelling fears of the euro's demise, reviving the confidence of the EU's political class that it can fend off electoral challenges from nationalist or antiestablishment parties and boosting optimism that the continent is mostly returning to normality after a lost decade.

Continue Reading Below

More ordinary Europeans are sensing the effects of a recovery that, in the past few years, has often felt like continued stagnation. Antonio Vallejo, finance director at Spanish restaurants and bars company Grupo Mercado de la Reina, said business has been improving steadily since the end of 2015.

"People started to go out for dinner again," he said. "You can see clearly that people spend more."

The return of growth rates above 2% annualized is likely to further encourage ECB officials who want to decide this fall, probably in September, to reduce monetary stimulus starting in early 2018.

Although eurozone inflation, at 1.3%, remains well below the ECB's target of just below 2%, central-bank officials believe solid growth should lead to more inflation pressure with a time lag, so that the need for extraordinary stimulus, especially for large-scale ECB purchases of bonds, will decline next year.

Financial markets are watching closely for signals about when and how quickly the ECB will reduce the bond-buying program, known as quantitative easing.

The program is widely regarded as an important factor in the region's escape from economic stagnation. The timing of the decision to phase it out is the ECB's most important decision in years.

The next hint could come when ECB President Mario Draghi addresses the U.S. Federal Reserve's economics conference on August 24-26 in Jackson Hole, Wyo.

The ECB could signal as soon as its next policy meeting on Sept. 7 that QE will be gradually wound down next year, according to officials with the bank. But the decision could be delayed until October, depending on the latest economic data, these officials say.

In July, Mr. Draghi described the recovery as "robust" and said policy makers would decide during the fall on the future of their bond-buying program, which is tentatively scheduled to end in December.

ECB watchers expect the stimulus program to be extended into 2018, but at a reduced scale. Most doubt the purchases will continue into 2019.

The ECB has already raised its growth forecast twice this year and may do so again in September. It now expects the eurozone economy to grow by 1.9% across 2017.

The European Union's statistics service, Eurostat, gave no breakdown of Monday's GDP growth data. Economists suspect both consumer spending and business investment contributed to the improvement.

Spain has already released data showing acceleration in the second quarter, while France said its growth rate was unchanged. Germany and Italy, the bloc's other major economies, have yet to report.

The recovery has lifted business and consumer confidence to highs not seen since before the global financial crisis. It has also helped reduce the eurozone's unemployment rate to 9.1% -- still high by international standards, but down from peak levels of around 12% during the crisis. Much of the fall in unemployment has occurred in Spain and Germany; job creation remains more sluggish in France and especially in Italy.

Growth is also easing the strains on government coffers in Spain. "Finally, some money has become available for public services, which is remarkable after so many people were laid off to cut costs," said Tomás Domingo, a high-school teacher from Tenerife in the Canary Islands.

Mr. Domingo said his school finally obtained money to fix the leaky roof of its sports pavilion, something it has been asking for since 2009.

"When it rained, it used to get flooded and the kids couldn't use it," he said, adding the school will also replace around 25 old computers.

Germany, Europe's biggest economy, is the other main pillar of the improvement. At machine-tool maker Trumpf Group from near Stuttgart, sales rose 11% to EUR3.1 billion ($3.6 billion) in the year to June 30. The company's order book is brimming, said chief executive Nicola Leibinger-Kammüller.

The same holds across much of Germany's engineering sector, which has long profited from global trade but now is also enjoying rising orders from eurozone countries, according to industry association VDMA.

The mood among German businesses is "euphoric," Clemens Fuest, head of German economics think tank Ifo said last month after the institute's business-confidence index hit a high.

Some early signs suggest growth might slow slightly in the second half of the year. A survey of 3,000 manufacturing companies released Tuesday found that activity in July increased at the slowest pace in four months.

But at 56.6, the Purchasing Managers Index for the sector still pointed to solid growth.

Write to Paul Hannon at paul.hannon@wsj.com, Tom Fairless at tom.fairless@wsj.com and Giovanni Legorano at giovanni.legorano@wsj.com

(END) Dow Jones Newswires

August 01, 2017 14:43 ET (18:43 GMT)