And itâ€™s back to deflation: after five months of readings slightly above zero, Eurozone headline inflation dipped into negative territory again in September. Todayâ€™s Eurostat flash estimate shows Eurozone inflation at -0.1%YoY, down from +0.1% in August. The decline is fully attributable to a fall in energy prices: September inflation excluding energy is unchanged at 1.0%. A litre of Euro95 gasoline at the pump fell from â‚¬1.43 in August to an average â‚¬1.37 in September. For now, Eurozone fuel prices remain above the January low of â‚¬1.30 though.
Outside of energy prices, there is little action in Septemberâ€™s inflation numbers. Core inflation held steady at 0.9%. Non-energy industrial goods inflation fell a tenth to 0.3%, while services inflation crept up to 1.3%.
ECB-president Draghi will have to tolerate inflation around zero for just a few more months, as low energy prices continue to drag down headline inflation. From December onwards however, energy will become a less important factor for headline inflation due to â€˜base effectsâ€™ (consumer energy prices started their steep decent last December). That should cause headline inflation to quickly recover to between 0.5% and 1.0%YoY, where it will likely remain for some time. This may diminish the pressure on the ECB to expand its QE programme. But with continuing high unemployment (unchanged at 11.0% in August) guaranteeing little nominal wage pressure, core inflation looks set to remain well below the ECBâ€™s comfort zone of just below 2% in the foreseeable future. Talk of QE expansion and extension will therefore remain with us for some time.
Eurozone Q2 GDP growth was adjusted upward to 0.4%QoQ in Eurostat’s 2nd estimate, up from 0.3% in the preliminary estimate â€“ although rounding helped a hand here, as growth turned out at 0.36%QoQ. But The first quarter was revised up too, from 0.4% to a genuine 0.52%.
GDP growth was driven primarily by net exports, contributing 0.3%-point to quarterly growth. The fall of the euro in the preceding two quarters has likely contributed to that. As often happens, the jump in net exports ate into inventories, which in turn subtracted 0.1%-point from quarterly GDP. Household consumption remained a reliable growth engine, contributing 0.2%-point. Consumption did decelerate somewhat in Q2 compared to the previous quarters. Investment disappointed, subtracting 0.1%-point from quarterly growth, although that comes right after a strong and upwardly revised first quarter.
Looking at individual countries, the Q2 recovery was made in Germany, but just as well in Spain. Eurostatâ€™s detailed GDP estimate shows that both countries contributed about 0.1%-point to the regionâ€™s GDP growth. Italy came in third, contributing 0.05%-point.
In sum, todayâ€™s figures show that the Eurozone economy was continuing its modest recovery in the second quarter. The first indications for the third quarter are more of the same. Employment is increasing. July retail sales were decent, showing that consumers continued to spend despite Greek and Chinese turmoil. Soft indicators such as the PMI and the European Commission sentiment survey have improved slightly in July and August, compared to Q2. Moreover, bank lending to non-financial businesses is finally recovering, suggesting that the third quarter may bring a pickup in investment. That would be an especially welcome sign of a broadening recovery.
With upward revisions to both the 1st and 2nd quarters, a 1.5% growth rate for 2015 comes back within reach. That said, risks to the Eurozone outlook remain tilted to the downside, as ECB-president Draghi was at pains to point out last Thursday. That is especially true for inflation: low commodity prices could push headline inflation back towards zero and in any case delays the recovery of inflation towards the ECB comfort zone. An intensification of the ECBâ€™s QE programme is not off the table yet.