News Analysis: Eurozone economic data raises concerns as Brexit creates negative impact

Growth in the 19-country eurozone faced headwinds in the second quarter and the slowdown, although in line with expectations, raised concerns about possible weakened growth momentum in the coming months, particularly at a time when uncertainty has been unleashed by Britain's historic vote to leave the European Union (EU).

The gross domestic product (GDP) in the single currency bloc increased only 0.3 percent quarter-on-quarter, down from 0.6 percent in the first three months of the year, according to a preliminary estimate published by Eurostat, the bloc's statistical office, on Friday.

The reading came as France, the second largest economy in the eurozone, unexpectedly saw no growth after expanding by 0.7 percent in the first quarter, which experts said was possibly due to a decline in inventories as well as the strike action over the government's proposed labor reforms.

Economists argued that the impressive growth in the first quarter proved to be another false dawn for the currency bloc, and the roller-coaster ride in the second quarter implied the fundamental factors would support further slowdown in the coming quarters this year.

Without a doubt, a major concern emerged after Britain voted to leave the EU on June 23, which was foreseen to have a bearing on growth of both the eurozone and Britain as it unleashed great uncertainty to ties between Brussels and London and could slow trade flows as well as hit confidence.

Brussels already nudged down the economic outlook earlier this month. Following the first assessment on Britain's vote, the European Commission, the bloc's executive body, downgraded the economic growth in the eurozone to between 1.5 and 1.6 percent for this year, down from the previously estimated 1.7 percent in May.

Explaining that Britain's "leave" vote was expected to slow private consumption and investment and impact on foreign trade, the Commission predicted a loss of 0.25 to 0.5 percent of GDP for the bloc by 2017. London was about to be hit heavier, with an estimated loss of 1.0 to 2.75 percent.

In a separate report, Eurostat data showed that inflation, a core figure closely followed by the bloc's central bank, was estimated to stand at 0.2 percent in July, up from the 0.1 percent in the previous month, primarily driven by food, alcohol, and tobacco prices.

Economists commented that inflation remained "uncomfortably low." But some voiced cautious optimism with saying the drag from energy prices should ease over the rest of the year, pushing up the headline rate of inflation.

"Core inflation, which was unchanged at 0.9 percent in July, is likely to remain weak, " warned Jack Allen, a European economist at Capital Economics.

Other data released on Friday revealed that much work remained to be done for the bloc's labor market as the unemployment rate disappointingly stayed unchanged at 10.1 percent in June. The double-digit reading has been a worrying sign urging more policy stimulus from Brussels and member states.

"Today's set of data gives policy makers only limited comfort. The good news is that the economy still has some momentum, though there is little acceleration to be expected as long as the Brexit story continues to inject some uncertainty into the external environment," says Peter Vanden Houte at ING Bank.

Pressure continued to be piled on the European Central Bank, which already introduced a series of massive stimulus measures, struggling to push the inflation to the target of around 2.0 percent, but its toolbox was widely viewed as getting emptier.

"Monetary policy has largely reached its limits," said Danae Kyriakopoulou, managing economist of the Centre for Economics and Business Research, adding that non-monetary stimulus measures were needed.

Further flexibility, leniency, and initiative on other levers of economic policy, particularly among those economies that can afford it, will be key in ensuring a sustainable recovery for the eurozone going forward, Kyriakopoulou said. Endit