By Balazs Koranyi
FRANKFURT, July 30 (Reuters) – The euro zone economy grew a touch faster than modest expectations last quarter as surging investment in AI, ample government spending and several one-off factors helped offset a drag from the war in Iran and soaring energy costs.
The economy of the 21 nations sharing the euro currency expanded by 0.4% on the quarter, above expectations for 0.2% in a Reuters poll, after a 0.2% contraction recorded in the previous quarter, data from Eurostat showed on Thursday.
Compared with the same quarter last year, growth in the bloc of 360 million people accelerated to 1.0% from 0.3% three months earlier, in above expectations for 0.5%.
The second quarter was initially expected to be the start of a rebound after a difficult and turbulent year for Europe. But soaring energy costs sapped much of the momentum and most forecasters now see full-year growth of less than 1% this year, below the bloc’s already much reduced potential.
This relatively slow growth is in stark contrast to the continuing boom in the U.S., which will likely see its economy grow more than 2% this year, fuelled in part by oversized and potentially unsustainable private sector spending on artificial intelligence.
Still, there appear to be some bright spots for the euro area.
Business investment in AI has been soaring in Europe as well, household consumption has held up against gloomy expectations, and Germany’s government is slowly but surely ramping up its long-promised spending on defence and infrastructure.
Industry, in the doldrums for year, has also held up against high energy costs surprisingly well and may have added to growth, unlike in previous years, when it was a persistent drag.
Germany, the world’s third-biggest economy, France and Italy all expanded by 0.2% on the quarter, while Spain, the bloc’s outperformer for years now, by 0.7%, above expectations for 0.6%. The Netherlands meanwhile expanded by 0.4%, twice the expected rate.
GROWTH BOOSTERS MAY NOT LAST
“Looking ahead, we suspect that the euro-zone will continue to weather the Iran energy shock reasonably well and are forecasting GDP growth of around 0.25% per quarter for the next year or so,” Andrew Kenningham at Capital Economics said.
“There are downside risks if energy prices remain very high, but these risks may be smaller than widely assumed,” he added.
Still, others point out that the economy, including the bloc’s vast industry, benefited from one-offs that may not last.
High energy costs and shortages of crude products may have affected Asian firms more, forcing buyers to turn to Europe, while some orders may also have been brought forward on fears that product shortages could become more acute later in the year.
The bloc also got a boost from 3.9% quarterly growth in Ireland, which was driven by multinational firms in IT and communication that are located there for tax purposes.
Irish GDP, though small, is so volatile — it contracted by 7% last quarter — that it can swing the euro zone number significantly and some now prefer to exclude it when studying underlying trends.
Industry’s boost and the quick Irish expansion may not last, suggesting the third quarter will be tough as the war keeps dragging on and high energy costs are slowly filtering down to consumers via petrol, airfare and holiday prices.
Household confidence may weaken as inflation erodes real incomes and higher interest rates at the European Central Bank also put pressure on consumers.
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
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