Euro area real GDP growth has been updated by the most recent EU Economic Forecast report for both 2021 and 2022. Inflation was revised higher as well.
Released quarterly, the EU Economic Forecast report is one of the most comprehensive analyses of the Euro area and European Union economies. Responsible for the forecasts is the European Commission, and traders care because the report covers the economic developments for the next two years.
Since the last report was issued in spring, the European Commission has upgraded both the outlook for economic growth and for inflation. The real GDP growth in 2021 was upgraded to 4.8% from 4.3% previously and for 2022 from 4.4% to 4.5%.
Inflation is expected to rise faster in the Euro area. Since the last report, inflation is seen now at 1.9% in 2021 and 1.4% in 2022. Changes in inflation expectations are important for traders in their efforts to anticipate the European Central Bank’s next move.
The common currency, the euro, was unchanged on the news. The lack of volatility is a characteristic of summer trading. Moreover, the markets were focussing more on the FOMC minutes, seen as more important.
Economic Developments in the Euro Area
The second quarter brought improving developments in the Euro area economies, after the marginal contraction in real GDP in the first quarter. Industrial output, for instance, recorded its eleventh consecutive month of expansion in April.
Business and consumer optimism grew in the second quarter of the year, and some revival in tourism activity was noted. As the vaccination campaigns in Europe gathered speed, the economic activity increased.
Inflation increased as well. The European Commission sees inflation in the Euro area at 1.9% in 2021 and 1.4% in 2022. For the ECB, the new data spells some trouble in the sense that declining inflation next year is diverging from the rising inflation in the United States. Therefore, the ECB will have a difficult task raising its interest rates from record lows in a low inflation environment.
For traders, the inflation outlook is more important than the economic one, for the simple reason that the ECB has a single mandate, one of price stability. Changes in inflation, therefore, are the main determinant of monetary policy decisions, with a direct impact on the euro.