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Europe’s economy is expanding once more as inflation is decreasing.

The economy in the euro zone has picked up again.

The official estimate for the second quarter of GDP in the 20 nations using the euro currency showed a growth of 0.3% from the previous quarter.

In the final three months of 2022, GDP in the euro area fell by 0.1%, and in the first quarter of this year, it remained flat.

Separately, government statistics demonstrated that inflation rates have been falling further this month. The annual rate of inflation in the Eurozone slowed to 5.3% from June’s 5.5%.

However, core inflation, which excludes the effects of changes in food and energy prices, remained constant at 5.5% in July. Additionally, both service inflation (5.6%) and food inflation (9.2%) increased.

Positive evidence

While the figures from Europe’s two largest economies on Friday indicated that a rebound was already starting, the euro area economy was struck hard last winter by the enormous surge in energy costs that followed Russia’s invasion of Ukraine.

The so-called “Putin shock” is fading for the most part. Energy and food prices that went through the roof hurt consumers a lot, but inflation is going down, employment is still going up, and wage growth is picking up. This means that households’ real disposable incomes are likely to go up a lot in the next few quarters, said Holger Schmieding, chief economist at Berenberg, in a research note released on Friday.

According to official numbers that were revealed on Friday, the French economy increased by 0.5% in the second quarter compared to the first quarter of this year, which was higher than what economists had predicted. Although Germany’s economy stalled in the third quarter, this was an improvement over the previous six months, when Europe’s largest economy was mired in recession.

Schmieding argues that the region’s economy may be slowing down despite a recent burst of positive data.

Growth in France was “entirely due to very strong exports,” he said, while domestic indications of demand “performed much worse,” with a 0.4% reduction in household consumption being one example.

He went on to say that the delivery of a cruise ship to an international buyer was a major factor in the one-time increase in exports.

According to a poll published by the ECB last week, demand for business loans in the euro area hit a record low in the second quarter. July’s rate of company contraction was the highest it has been in eight months, according to a separate study.

The preliminary Purchasing Managers’ Index reading fell to 48.9 from June’s 49.9. This index measures business activity in the manufacturing and service industries. A number less than 50 shows a decreasing trend.

Rate increases on hold?

On Thursday, the European Central Bank (ECB) increased the key interest rate for the Eurozone by a quarter of a percentage point, to 3.75%. This marked the ninth straight increase by the ECB.

However, European Central Bank President Christine Lagarde hinted to the press in August that she would hold off on raising interest rates at the ECB’s upcoming meeting in September.

While consumer price inflation has dropped significantly from a record 10.6% in October 2022, it is still much above than the European Central Bank’s aim of 2%.

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