Eurozone growth beats forecasts, but inflation risks remain
The eurozone economy expanded by 0.4% in the second quarter, while annual inflation rose to 2.9% in July. US GDP grew less than expected, but consumer spending and AI-related investment stayed solid.
The US economy grew at an annualised rate of 1.5% in the second quarter, or 0.4% from the previous quarter, slightly below expectations. Household consumption rose 3.2% on an annualised basis, recovering after a weak previous quarter. Growth was held back by inventory drawdowns, softer goods exports and lower government spending. In year-on-year terms, US GDP was 2.1% higher.
Investment linked to artificial intelligence continued to grow rapidly, and housing investment increased for the first time in six quarters. Household incomes kept rising, but the saving rate fell below 3% of disposable income as fuel costs absorbed more spending. According to a Bloomberg survey, analysts expect US growth of 2.2% in 2026 and 2.1% in 2027; before the outbreak of the US-Iran conflict, the forecast had been 2.5%.
The eurozone economy expanded by 0.4% in the second quarter, significantly beating analyst forecasts and continuing a run of positive surprises. Every country that has published GDP data reported growth, including Ireland, whose output had contracted sharply in the previous two quarters. Annual growth accelerated to 1%, up from 0.5% in the first quarter. Germany's GDP rose 0.2% quarter on quarter and 0.9% year on year, the fastest annual increase since 2022. Analysts project eurozone growth of 0.6% in 2026 and 1.2% in 2027.
Inflation in the eurozone edged up to 2.9% in July from 2.8% in June, with core inflation at 2.5%. Faster energy-price growth was the main driver. Oil prices have risen more than 20% since late June after the US-Iran ceasefire collapsed and the Strait of Hormuz was closed again; natural gas prices also climbed. Food-price inflation continued to moderate, reaching 1.2% — the lowest since mid-2021. Inflation is expected to stay near 3% by the end of this year, easing to 2.2% next year.
The Federal Reserve held its benchmark rate at 3.5–3.75% in July. New Fed chair Kevin Warsh struck a cautious tone, noting that financial markets had already done part of the central bank's work. Three of the twelve voting members favoured a rate increase. Futures pricing points to two quarter-point hikes, with the first expected in September or October, and the policy rate potentially settling at 4–4.25%. Treasury yields rose across maturities.
