Here is a short interpretation of European GDP data for Q2 that were published today. There are several pieces of good news: 1) Recession in a technical sense ended, as euro area GDP increased by probably 0.3% q/q after six consecutive quarters of decline (data were not yet out while I was typing). 2) Germany (0.7%) was not the only engine of growth as activity in France (0.5%) picked up as well, mainly driven by domestic demand. 3) The recession eased in the Netherlands, Italy, Spain, and Greece. And here are the caveats: 1) The improvement should also be seen against the backdrop of a weak first quarter which was due to the long winter in large parts of Europe. There were catch-up effects especially in the construction sector that exaggerate the underlying trend. 2) From the little details that are out for now, we know that corporate investment spending was quite weak again. Companies in general are not overly optimistic, and they are credit-constrained in a few countries. 3) French data are a bit of a riddle as the gap between the remarkable increase of GDP in Q2 and what monthly data indicated is quite large. There might be downward revisions to GDP. Looking forward, the euro area seems on track for a slow recovery that remains vulnerable to shocks. In contrast to the US, the conditions for a sustained acceleration are not yet in place as private sector deleveraging goes on and fiscal policy is still restrictive (although less than before). The recovery will need support from an extremely lenient monetary policy ?for an extended period of time ?. Employment is unlikely to rise before next year, so for many people, it will still feel like a recession despite the increase in GDP. In Q2, growth in Germany was stronger than in any other major industrial country. That certainly means tailwind for Angela Merkel?s coalition government for the upcoming election (see our election guide here ). Euro area real GDP data for Q2 (% change over Q1): Germany: 0.7% France: 0.5% Austria: 0.2% Belgium: 0.1% Italy, Netherlands: -0.2 Spain:-0.1%
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