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U.S. Markets

Euro zone inflation unexpectedly ticks up amid record GDP slump

BRUSSELS (Reuters) - The euro zone’s economy recorded its deepest contraction on record in the second quarter, preliminary estimates showed on Friday, while the bloc’s inflation unexpectedly ticked up in July.

In the months from April to June, gross domestic product in the 19-country currency bloc shrank by 12.1% from the previous quarter, the European Union’s statistics office Eurostat said in its flash estimates.

The deepest GDP fall since the time series started in 1995 coincided with coronavirus lockdowns which many euro zone countries began to ease only from May.

The contraction was slightly more pronounced than market expectations of a 12.0% fall, and followed the 3.6% GDP drop recorded in the first quarter of the year.

Among the countries for which data were available, Spain posted the worst output slump, with its economy shrinking by 18.5% quarter-on-quarter, worse than expected and wiping out all the post-financial crisis recovery of the last six years.

GDP in Italy and France also fell sharply but less than forecast, respectively by 12.4% and 13.8%. Germany, the largest economy in the bloc, saw a 10.1% contraction in the second quarter, worse than expectations of a 9.0% slump.

Inflation continued instead its upward trend, defying expectations of a slowdown, supporting the European Central Bank’s expectation that a negative headline reading may be avoided.

Eurostat said consumer prices in the bloc rose 0.4% on an annual basis in July from 0.3% in June and 0.1% in May. Economists polled by Reuters had forecast a 0.2% increase in July.

Underlying price pressure also accelerated. Excluding volatile food and energy prices, a key measure watched by the ECB, inflation rose by 1.3% from 1.1% in June, Eurostat’s flash estimates showed.

An even narrower gauge, which also excludes alcohol and tobacco, jumped to 1.2% from 0.8% in June.

The acceleration in headline inflation was driven by higher prices of industrial goods which rose by 1.7% after a 0.2% increase in June.

Food, alcohol and tobacco prices went up by 2.0% on the year, but slowed from the 3.2% rise recorded in June.

Energy prices fell by 8.3% in July, after plunging 9.3% in June.

Reporting by Francesco Guarascio, Editing by Gabriela Baczynska and Raissa Kasolowsky

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