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Nick Kounis, Head of Financial Markets research at ABN AMRO explained that the EZ GDP data this morning confirmed the slowdown in the eurozone economy in the first half of this year.  

Key Quotes:

“GDP growth eased to 0.3% qoq from 0.4% in Q1, and way down from the 0.7% growth rates we saw in the last three quarters of 2017. This raises the question whether the slowdown represents a soft patch in the recovery or whether the eurozone economy is on the way to a downturn. We think that the economy is most likely in a soft patch. The slowdown has been driven mainly by the weakness in world trade over recent months and there are signs of stabilisation there recently as well as in a number of business confidence indicators in the eurozone. At the same time, domestic fundamentals remain good. Financing conditions are accommodative, the housing and labour markets are doing well and the revival in investment spending looks to be on track. Our baseline scenario is that the economy should regain some traction later in the year, as world trade firms and the inventory correction in the industrial sector is completed.”

“Nevertheless, there remains uncertainty about the economic outlook. The escalation of protectionism could undermine business confidence. In addition, there are as yet few signs that eurozone economic indicators are turning up. So the risks look to be skewed to the downside for now.”

“What are the implications for monetary policy? The economic uncertainty supports the ECB’s cautious approach and forward guidance that interest rates will remain on hold for more than a year from now. In addition, the risks are skewed towards a slower recovery in inflation than it expects given a slower pace of growth, which means that slack in the labour market will take longer to dissipate. Indeed, although core inflation rose in July (to 1.1% from 0.9% in June according to today’s flash estimate), the trend has been roughly sideways over the last few months. In addition, wage and unit labour cost growth remain at subdued levels.”