Gas prices are displayed at a gas station in Frankfurt, Germany, Friday, July 28, 2023. At right the European Central Bank. The German economy is still failing to grow, figures showed Friday, as the country that should be the industrial powerhouse for all of Europe struggles with high energy prices, rising borrowing costs and a lagging rebound from key trading partner China. (AP Photo/Michael Probst)
FRANKFURT, Germany — The European economy grew modestly in the most recent quarter, breaking out of a months of stagnation or contraction as higher interest rates designed to fight inflation make it more expensive for households and businesses to borrow, invest and spend.
The 20 countries that use the euro currency and their 346 million people saw 0.3 percent growth in the April-to-June period, the EU statistics agency Eurostat reported Monday. That’s an improvement over zero growth in the first quarter of this year and a slight decline in fourth quarter of last year, but not by much.
A revision raised figures for the first quarter from a decline of 0.1 percent , wiping out two straight quarters of declining output. Inflation in the eurozone, meanwhile, continued its gradual decline, falling to 5.3 percent in July from 5.5 percent in June.
READ: Euro zone inflation falls again in June as energy prices tumble
Europe’s economic growth got a boost by 0.5 percent growth in France and 0.4 percent in Spain, where lower inflation has helped lift consumer spending power.
The French figure, however, was increased by a one-off: the delivery of one very large manufactured item, a cruise ship. That statistical quirk flattered the French growth figure but does little to disguise weak demand for goods in the eurozone’s second-largest economy.
The most growth was posted by Ireland at 3.3 percent . The country’s growth figures often show large swings due to major international companies locating their headquarters there.
Europe’s largest economy, Germany, struggled in the second quarter, recording zero growth after two straight quarters of falling output as it grappled with high energy costs tied to Russia’s war in Ukraine.
READ: German economy enters recession
Europe is still struggling with the aftershocks of Russia’s invasion of Ukraine, with Moscow cutting off most of its natural gas to the continent, sharply raising prices for the fuel and the electricity it generates.
In Germany, Europe’s manufacturing powerhouse, Vice Chancellor and Economy Minister Robert Habeck has proposed capping energy prices for industry with government help.
The worst of the price spike is over, but costs are still higher than before the war began. Energy has faded as a main driver of inflation, but price rises are hitting Europeans when they shop for groceries, clothes and more, and the rebound for services companies such as hotels and restaurants that suffered during the COVID-19 pandemic has mostly run its course.
Rebounding travel, especially in the Mediterranean countries that heavily rely on tourism, is expected to support growth in the third quarter as people flock to the beach for their summer holidays in Greece, Spain and Italy, despite recent heat waves and wildfires.
Other than that, prospects for the rest of the year are muted. Another drag on the economy is the rapid series of interest rate increases that the European Central Bank has unleashed to knock down inflation.
READ: ECB raises rates to 23-year high; keeps options open for September
The ECB made its ninth straight hike Thursday, bringing its key deposit rate from minus 0.5 percent to 3.75 percent in just one year, a record pace since the creation of the euro in 1999. The result has been higher mortgage rates and canceled construction plans due to expensive or unavailable credit.
The central bank’s lending survey shows the lowest level of business loans and credit lines since the statistics started in 2003. Bank President Christine Lagarde left open whether the bank will keep hiking rates at its next meeting on Sept. 14, saying the decision will depend on incoming inflation data at the time.
Since the rate hikes began, inflation has steadily fallen from a peak of 10.6 percent in October to 5.5 percent in June, still well above the ECB’s 2 percent target. Bank officials say tough action now will spare even more painful restriction of credit later if inflation gets completely out of control.