Bittersweet Readings

Eurozone GDP growth exceeds expectations in Q2, but a recession is looming

Dear readers, warm greetings from sunny Brussels to you. This edition of the CCCEU Weekly Update keeps a close eye on the EU's latest key economic readings, including Q2's encouraging GDP growth and July's jaw-dropping inflation (again), as well as other key China-EU dynamics. Enjoy reading and have a lovely weekend!

Inflationary pressures, an energy crisis, a conflict between Russia and Ukraine, the euro's parity with the US dollar... Europe's economic growth environment is becoming more complex and difficult. The news from the other side of the Atlantic isn't much better: according to the US Commerce Department's first estimate, released on July 28, the US economy has contracted for two consecutive quarters, with GDP falling 0.9 percent in the second quarter of this year.

Eurostat released second-quarter Eurozone and EU GDP growth data and inflation estimates for July at 11 a.m. local time on Friday, following the release of GDP growth data by major EU economies such as Germany, France, Spain, and Italy. Some figures exceeded market expectations, such as Eurozone, EU, France, Italy, and Spain growth, but German GDP growth stalled in the second quarter, and GDP shrank in a number of countries, including Lithuania, Latvia, and Portugal.

Let's start with the specifics: In terms of GDP, Eurostat released preliminary estimates on Friday, saying that seasonally adjusted GDP in the 19-country eurozone and the wider EU increased by 0.7 percent and 0.6 percent, respectively, year on year between April and June.

At the national level, the Eurozone's powerhouse, Germany's economy stalled in the second quarter, but "at least Germany avoided a contraction," said an ING analysis, warning a technical recession in the second half looks like a done deal for the country.

The components of GDP will not be published until the end of August, but based on available monthly data through May and press releases from the statistics agency, public and private consumption boosted economic activity, while construction and trade slowed. "

"Supportive factors for the economy, such as post-lockdown reopenings and filled order books, have been losing momentum rapidly." Weaker global demand, supply chain frictions, and high inflation denting consumption are hitting the German economy. "In fact, consumer confidence is already in clear recession territory and it looks as if the rest of the economy is quickly following suit," it noted.

The French economy, the second largest in the EU, surprised the market with a 0.5% expansion in the second quarter, after a contraction in the first three months of this year. The same can be said for Italy and Spain. Despite being buffeted by a political storm, Italy's GDP grew by 1% during the same period, three times faster than the market expected. Despite a staggering 10.7 percent inflation rate in July, Spain's GDP increased by 1.1 percent in the second quarter.

However, France's encouraging return to growth hasn't squashed all fears of a recession, says Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown."The underlying picture is less positive," she commented, adding that household consumption fell in the quarter, likely a result of increased fiscal prudence, while government spending also came off the boil. "The overall data set is of course a relief, but this has done little to completely erode recessionary fears."

Furthermore, data shows that Austria, Belgium, Sweden, and the Czech Republic all experienced economic growth, but Lithuania, Latvia, and Portugal saw GDP fall by 0.4 percent, 1.4 percent, and 0.2 percent, respectively, between April and June.

In terms of the most recent estimate of July inflation, the record-breaking reading is set to shake market confidence once more: the Eurozone just experienced another shock with the terrifying 8.9 percent rate. Many countries experienced two-digit inflation rates; for example, Estonia's inflation was estimated to be 22.7 percent this month, followed by Latvia and Lithuania, which had 21 percent and 20.8 percent, respectively. Furthermore, inflation rates in the Netherlands, Greece, Spain, and Belgium may rise by 11.6 percent, 11.5 percent, 10.8 percent, and 10.4 percent, respectively.

Malta had the "lowest" figure at 6.5 percent, while France and Italy had 6.8 percent and 8.4 percent, respectively. Eurostat also predicted that Germany's inflation rate in July would be 8.5 percent, slightly lower than the previous month's figure.

Overall, energy prices have eased slightly compared to June in the Eurozone, with annualised inflation expected to be 39.7 percent; excluding the surge in energy prices, annualised inflation is also expected to be 5.4 percent in July.

Many market analysts now believe that the eurozone economy will stagnate or even contract later this year. Capital Economics believes that "The chunky increase in euro-zone GDP in Q2 was due to the re-opening of the services sector, which has masked a deterioration in most other parts of the economy."

"We expect a triple whammy of high inflation, tighter monetary conditions, and an energy crisis to push the economy into recession later this year."

It projects zero growth for Q3 and thinks the euro-zone as a whole will enter a recession in Q4.

For ING, July's price hikes were "ugly". Both the supply-side problems causing high inflation and the second-round effects resulting from this show no imminent sign of relief. Energy inflation was only slightly lower at 39.7% as gas supply concerns are keeping prices elevated. "The market prices for natural gas reached new peaks this month, translating into high consumer prices once again," it said in an analysis.

"Food inflation also continues to trend up as higher transport costs, shortages, and uncertainty around Ukrainian supply have pushed up producer prices, which are still being priced through to the consumer." "With market prices trending lower for food commodities, some relief could be seen over the course of the second half though," it noted.

It added: "With a recession looming and inflation reaching new highs, the question is how the ECB will respond to an economy that is already cooling down." Don't rule out the ECB's front-loading hikes, so 50 basis points in September is definitely still on the table. "

Xi speaks with Biden over the phone.

According to Xinhua, Chinese President Xi Jinping spoke with U.S. President Joe Biden on the phone at the request of the latter on Thursday evening. The two presidents had candid communication and exchanged views on China-U.S. relations and issues of mutual interest.

Xi elaborated on China's principled position on the Taiwan question. He highlighted that the historical context of the Taiwan question is crystal clear, and so are the fact and status quo that both sides of the Taiwan Strait belong to one and the same China.

The three China-U.S. joint communiques embody the political commitments made by the two sides, and the one-China principle is the political foundation for China-U.S. relations, Xi said, adding that China firmly opposes secession aimed at "Taiwan independence" and external interference, and never allows any room for "Taiwan independence" forces in whatever form.

The position of the Chinese government and people on the Taiwan question is consistent, and resolutely safeguarding China's national sovereignty and territorial integrity is the firm will of the more than 1.4 billion Chinese people, he said.

The will of the people cannot be defied and those who play with fire will perish by it, he said, adding that it is hoped that the United States will be clear-eyed about this.

He also called on the United States to honour the one-China principle and implement the three China-U.S. joint communiques both in word and in deed.

Beijing angered by Pelosi's proposed visit to Taiwan

Chinese Foreign Ministry spokesman Zhao Lijian said on July 28 that over the past few days, the Chinese side has repeatedly made clear to the US side its firm opposition to the potential visit of Speaker Pelosi to Taiwan. Apart from the foreign ministry spokesperson, China's Ministry of National Defense and the Taiwan Affairs Office of the State Council also made statements on the issue. The Defense Ministry Spokesperson said that if the US side insists on making the visit, the Chinese military will never sit idly by and will certainly take strong and resolute measures to thwart any interference by external forces and secessionist attempts for "Taiwan independence." We Chinese mean what we say.

IMF says global economy is edging towards recession

According to Xinhua, the International Monetary Fund (IMF) on Tuesday revised down global growth forecast for 2022 and 2023 amid a higher-than-expected inflation, tighter financial conditions and the Ukraine crisis, warning that the balance of risks is "squarely to the downside."

In the newly released update to its World Economic Outlook (WEO), the IMF said that inflation could "remain stubbornly high" and disinflation could prove more costly than expected. In a "plausible alternative scenario," global growth will decelerate further to a pace close to a global recession.

EU member states agree to cut off 15 pct of their gas demand

According to Xinhua, European Union (EU) member states have reached a political agreement on a 15 percent voluntary reduction of natural gas demand from the average of 2017-2021, officials announced on Tuesday.

EU digitization level Finland leads the way, admits 5G and other laggards

According to China News Agency, the European Union released the 2022 "Digital Economy and Society Index" (DESI) on the 28th, showing the digitization of Finland, Denmark, the Netherlands, and Sweden among the 27 EU member states. The level is among the best, but overall, the EU lags behind in the areas of digital skills, digital transformation of SMEs and even 5G.

What are experts talking about?

"China-EU global development partnership needed" by Zhang Min, published by the Institute of European Studies of the Chinese Academy of Social Sciences. China and the EU are both pioneers and practitioners in promoting global development. Future cooperation between the two should be based on in-depth alignment of their respective development strategies, such as the China-proposed Belt and Road Initiative, the China-proposed Global Development Initiative, the European Green Deal, and the EU's Global Gateway.

Based on this, China and the EU are bound to play a more active leading role in global development areas such as boosting global economic growth, achieving innovation-driven growth, and promoting green cooperation.

"With a looming winter gas crisis, the EU doesn't need an empty symbol of solidarity," by Daniel Gros, published by CEPS. The article argues that EU energy ministers' recent 'political agreement' on natural gas was touted as an example of European unity and solidarity. It might be a show of political unity, but there was very little substance on display. Europe does not need lofty proclamations of energy solidarity. It just needs to let the internal market work, and policymakers need to ensure that consumers face up to the true cost of energy.

Please note: the English version of this issue is slightly different from our Chinese one. The views and opinions expressed in this article do not necessarily reflect the official position of the CCCEU.