Economic Watch: What is behind Q2 growth in euro area

BRUSSELS, Aug. 1 (Xinhua) -- The euro area economy grew more strongly than expected in the second quarter, up by 0.4 percent quarter on quarter, the European Commission announced on Thursday.

Despite heightened geopolitical tensions and rising inflation, gross domestic product (GDP) edged up across European countries in the second quarter, according to data released by the statistical office of the European Union (EU).

The better-than-expected quarterly figure might bring a brief relief but little reassurance of a solid and consistent rebound.

THE IRELAND FACTOR

Ireland stood out as the growth leader in EU economies in the second quarter, with its GDP expanding by 3.9 percent quarter on quarter.

As Ireland hosts a large number of multinational corporations, its GDP growth is largely dependent on the performance of multinationals, which experienced a contraction of 7 percent in the first quarter, blamed on multinational sector volatility.

The volatility of GDP in Ireland can be so distorting at times that it has been singled out at the regular European Central Bank (ECB) press conference when the topic of economic growth was touched upon.

Excluding Ireland, the eurozone GDP growth would have been 0.1 percentage points lower in the second quarter, according to calculations of the independent economic research firm Pantheon Macroeconomics.

Bert Colijn, chief economist for the Netherlands at ING, said in a note that "eurozone headline GDP data continues to be distorted significantly by jumps in Irish data, which is notorious for being influenced by multinational accounting activity."

Although the economic rebound appears to be broad-based in the EU, the divergence remains pronounced.

Across the European economies, Belgium and Austria stagnated in the second quarter and others grew at different paces.

Lithuania's economy rebounded from a contraction to grow by 1.7 percent quarter on quarter in the second quarter. Sweden followed with a growth of 1.4 percent. The two southern European countries, Spain and Portugal, outperformed their western peers with strong quarterly growth, at 0.7 percent and 0.8 percent, respectively.

Economic growth in three major European economies seems less encouraging. The economy slowed to 0.2 percent in Germany in the second quarter, after a 0.4 percent growth in the first quarter. GDP in France reversed the contraction in the first quarter and climbed by 0.2 percent quarter on quarter. The Italian economy advanced by 0.2 percent, slightly down from the first quarter's 0.3 percent.

OVERSHADOWED OUTLOOK

The fundamentals have barely changed in the euro area in spite of the rosy GDP data in the second quarter. The economic outlook will continue to be clouded by geopolitical tensions in the Middle East, U.S. tariff policies, energy prices and renewed inflationary pressures.

According to Pantheon Macroeconomics, consumer spending in the euro area slowed and investment declined in the second quarter, leaving exports as a main driver of growth.

The export-dependent European economies, particularly Germany, are still heavily dependent on net exports, exposed to erratic U.S. tariffs, commented Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

The "flaring-up" of tensions in the Middle East has been pushing oil prices higher, adding to upside pressures on inflation in the euro area.

In a speech made in Ireland last Friday, Philip Lane, a member of the ECB Executive Board, highlighted energy price risks, global trade and supply bottlenecks as key to the euro area economic outlook.

In a statement released following its regular rate-setting meeting last week, the ECB urged euro area countries to take "urgent action to strengthen the euro area economy while maintaining sound public finances." ■