Euro area out of recession, but sticky inflation

This week has seen a number of key euro area data releases. At first glance the combination of a stronger than expected GDP bounce in the first quarter and stronger than expected core inflation doesn’t look supportive for prospects of European Central Bank (ECB) rate cuts.

It’s worth noting though that after back revisions, the euro area was in a very mild technical recession at the end of 2023 and – likely more important from an ECB perspective – services inflation finally fell below 4% year-on-year. The pick up in activity data and still high services inflation, however, do support the ECB cutting cautiously and with a break between a widely expected cut in June and cutting again. 

Euro area April Consumer Price Index (CPI) data was in line at 2.4% year-on-year, unchanged from March. Annual core inflation fell, but not quite as much as expected to 2.7% after 2.9%. However, we did finally see some downward movement in services CPI to 3.7% after five consecutive quarters of 4.0% readings.

First quarter euro area GDP bounced a stronger than expected 0.3% quarter-on-quarter in the first quarter (consensus: 0.1%). It turns out that on the latest vintage of data the euro area was in a very mild technical recession in the second half after all, with two consecutive quarters of -0.1% quarter-on-quarter GDP.

As with recent Purchasing Managers' Index readings, there is a bit of a pattern in the GDP data of France and Germany looking more subdued than much of the rest of the euro area. First quarter France GDP rose 0.2% quarter-on-quarter, a touch stronger than expected. Germany GDP rose 0.2% quarter-on-quarter, slightly stronger than expected after a downwardly revised -0.5%. Spain GDP, however, rose 0.7% quarter-on-quarter for a second quarter, stronger than expected and Italy rose 0.3% - again stronger than expected.

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