In addition, this month we highlight the following developments:
• Economic activity stagnated in Q2, and we do not expect any significant acceleration in H2. Inventories were the main culprit of the disappointing Q2, as their negative contribution to growth offset a slight increase in final domestic demand and a modest contribution from net exports. We look for the situation to remain fragile in the near term, as euro area growth is still vulnerable to external shocks. We revised down our 2014 growth forecast to 0.7%, mainly the result of deteriorating outlooks in France and Italy. Only mild growth in H2 is consistent with the ongoing weakness recorded by business surveys. PMIs edged down further in September, on the back of consolidation in the services sector. Forward-looking components declined again, in line with our view that growth is unlikely to accelerate significantly.
• Other activity indicators confirmed this economic stagnation. Industrial production started Q3 on a strong note (+1.0% m/m), but holiday effects may have provided an upward bias in July. The carryover for Q3 is slightly positive at +0.4% m/m, which would be a minor improvement on the 0.0% q/q in Q2 and, thus, consistent with our forecast of only a modest rise in Q3 growth. Retail sales declined in July, echoing the deterioration of consumer confidence. Our private consumption tracker attaches slight downside risks to our forecast of a 0.2% rise in private consumption in Q2.
• Further modest improvements occurred in the labour market, as employment grew again in Q2 and the unemployment rate stood at 11.5%, the lowest level since September 2012. The number of unemployed remained broadly stable in July, edging up only 4k, while hiring intentions from August EC and PMI surveys moderated somewhat. We continue to look for modest employment growth in the coming quarters, while the unemployment rate should decrease only gradually as the recovery remains moderate.
• Euro area inflation remained subdued over the summer and was stable at 0.4% in August. We expect further weakness in September (+0.3% y/y), followed by modest and slow increases from October onwards. We continue to forecast HICP inflation to average 0.5% this year, yet we have revised up our 2015 projection to 0.8% y/y (only a marginal revision at two decimal places). In our view, base effects stemming from food and energy are likely to exert upside pressure on headline inflation until Q3 15.
• Money growth improved again in July, while bank lending continues to stabilise. M3 money growth recorded the strongest rise since September 2013 (1.8% y/y in July). We expect further acceleration in the short term due to the ECB’s new targeted longer-term refinancing operations. Lending to the private sector showed further signs of stabilisation, even though deleveraging continues. The July bank lending survey also pointed to a gradual easing of credit conditions.