Eurozone Q2 growth likely to moderate as private sector activity loses momentum

Growth in the Euro zone during the second quarter is expected to moderate as private sector activity lost momentum during the period amid contraction in industrial production during May.

Lead indicators signal the second quarter growth will moderate to 0.3 percent q/q, seasonally adjusted, taking the on-year pace to 1.6 percent. July inflation and June unemployment numbers are also expected to derive  attention, after growth in first quarter was strong at 0.6 percent q/q, seasonally adjusted, translating to 1.7 percent y/y.

Consumption and public spending will emerge as supportive of headline growth, whilst the external sector faces headwinds. Discretionary incomes likely got a hand from the slow but easing unemployment rate and still low inflation. Private sector activity and May industrial production is likely to have contracted 1.2 percent m/m, offsetting the 1.4 percent rise in April.

However, the negative spillover effects from the fallout of Brexit are less likely to factor in this series of data, with GDP in the third quarter likely to soften further. With this, the full year growth forecast of 1.7 percent has been exposed to risk. The European Commission sees downside risks to the tune of -0.1 percent to -0.2 percent from their baseline estimates this year.

Meanwhile, there is likelihood that the European Commission and Italian authorities unveil plans to inject funds through a combination of bail-in of banks, creditors and public funds. At last week’s rate review, the ECB has also opined on the need for a public backstop, but played down expectations that NPL problems (including Italy’s) can be resolved in a hurry.