Eurozone officially exits the recession in the second quarter

The economic situation in the Eurozone worsened less than expected in the second quarter, according to seasonally adjusted gross domestic product (GDP) figures released by Eurostat (release).

Compared to the same period the year before, GDP fell by 0.7 per cent – beating analysts’ expectations of a 0.8 per cent fall.

And quarter-on-quarter, GDP was up 0.3 per cent, following a 0.3 per cent fall in the first quarter - meaning the Eurozone officially exited the recession. Analysts had expected to see 0.2 per cent growth.

This follows strong economic growth in France and Germany, as reported this morning.

But the good news should not mask the fact that some Eurozone countries are struggling. Year-on-year, the Cypriot economy contracted by 5.2 per cent, Greece by 4.6 per cent, Italy 2.0 per cent, the Netherlands 1.8 per cent and Spain 1.7 per cent.

Archer Howard, chief UK and European economist at IHS Global Insight, said consumer and business confidence seems to gradually be feeding through to provide "limited support" for real economic activity, helped by a slowing pace of fiscal tightening and an accomodative monetary policy.

While the second quarter expansion was modestly better than expected, the Eurozone still faces a tough job developing recovery momentum. We expect the upside for growth to remain limited for some considerable time to come by serious headwinds, notably including still restrictive fiscal policies (even though countries are being given more flexibility on this), ongoing tight credit conditions amid still significant banking sector problems, very high (and still likely further to rise unemployment) and muted consumer purchasing power. Given this environment, businesses are likely to only gradually raise their investment plans.

Consequently, we expect Eurozone GDP to contract by 0.5% in 2013 and then grow by 0.7% in 2014.

On the face of it, the Eurozone’s better-than-expected return to growth in the second quarter reduces the case for the ECB to take interest rates lower. Even so, we would not rule out the ECB eventually taking its key policy rate down from 0.50% to 0.25%.