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The eurozone economy and the EU economy pulled out of contraction in the second quarter of this year, but inflation in Europe remains high, according to data released by Eurostat. Analysts pointed out that under the current environment of high inflation and high interest rates in Europe, domestic demand and investment are weak, and there are still downward economic risks in the future.

According to preliminary data released by Eurostat on July 31, on a seasonally adjusted basis, eurozone gross domestic product (GDP) increased by 0.3% quarter-on-quarter and 0.6% year-on-year in the second quarter of this year, while EU GDP grew by zero quarter-on-quarter and 0.5% year-on-year.

From a country point of view, the EU's largest economy Germany in the second quarter of GDP growth zero, France and Spain GDP growth of 0.5% and 0.4% respectively, Italy's GDP contracted 0.3%, Sweden, Austria, Lithuania and other countries are also in recession. Separately, Ireland's GDP grew 3.3% in the second quarter from the previous quarter, the fastest in the euro zone.

At the same time, Eurostat also published inflation data for July. Eurozone inflation was 5.3 per cent at an annual rate, down from 5.5 per cent in June. However, core inflation, which strips out prices such as energy and food, is 5.5%.

Specifically, food, tobacco and alcohol prices rose the most, while energy prices fell. In terms of countries, inflation is 6.5% in Germany, 5.0% in France, 6.4% in Italy and 2.1% in Spain. In all three Baltic countries, where inflation had been consistently above 20%, it fell below 10% in July.

It is widely believed that the economic data in the second quarter brought some "relief" to the European Union, which is facing recession.

In the fourth quarter of last year, the eurozone economy shrank 0.1 per cent from the previous quarter. The eurozone economy also shrank 0.1 per cent in the first three months of the year compared with the previous quarter, according to figures released in June by Eurostat, the European Union's statistical office. The outlook for the eurozone economy has been clouded by two consecutive quarters of negative growth, meaning the economy is in a "technical recession".

However, not only did the eurozone economy grow in the second quarter, but the first quarter was also revised down to zero year-on-year growth. In addition, the EU economy grew 0.2% in the first quarter compared with the second quarter. The two figures pulled the European economy back from the brink of recession. Some ECB officials have even said bluntly that the eurozone economy has achieved a "soft landing."

However, local media analysis pointed out that the eurozone's economic growth in the second quarter was largely driven by Ireland, but Ireland's GDP was very unstable by multinational companies, and the country's economy shrank in the fourth quarter of last year and the first quarter of this year. Moreover, zero quarter-on-quarter growth in Germany does not bode well for the outlook for the EU as a whole.

In the eyes of analysts, the European economy has been teetering on the brink of recession since last winter because of the energy crisis triggered by the conflict between Russia and Ukraine. Despite the better economic data in the second quarter, it cannot hide the reality of weak growth in Europe. An International Monetary Fund report released at the end of July predicted that the eurozone economy would grow by 0.9% this year, with Germany contracting by 0.3%.

Overall, the existence of the "double highs" will exert continued pressure on the European economy.

One is high inflation. Since last year, soaring energy prices have led to high inflation in Europe, pushing energy-intensive businesses out of business or up costs, and pushing up the cost of living for ordinary people. Today, high energy prices are still having a dampening effect on German manufacturing. According to a survey by the Haller Institute for Economic Research, the number of partnerships and corporate bankruptcies in Germany rose to the highest level since 2016 in June.

While overall inflation is now down and energy prices are falling, it is still above the European Central Bank's 2% target. Moreover, inflation is currently being held down mainly by the prices of food and alcohol, tobacco, services, and non-energy industrial goods, which will weaken domestic consumption and hinder economic recovery.

The second is high interest rates. To curb inflation, the ECB has raised interest rates nine times since July last year, by a total of 425 basis points. Since August 2, the main refinancing rate, marginal lending rate and deposit mechanism rate have reached 4.25 percent, 4.50 percent and 3.75 percent respectively.

The purpose of raising interest rates is to reduce the amount of money in circulation, which lowers inflation, but also increases financing costs for businesses and discourages investment and production. This is a side effect of monetary tightening on economic growth.

According to a report by the European Central Bank, corporate demand for loans hit a 20-year low in the second quarter due to high interest rates. Some German economists worry that higher interest rates could lead to continued declines in German GDP in the third and fourth quarters.

A string of data points also reflect the current difficulties of the European economy. The euro zone purchasing managers' index (PMI) came in at 48.9 in July, followed by Germany's 48.3 and France's 46.6, all below the 50-point line that separates expansion from contraction. A survey by the IfR Institute for Economic Research in Germany also showed that the German business climate index fell for a third consecutive month in July, falling to 87.3 percent from 88.6 in June.

European Central Bank President Christine Lagarde recently said that in the future eurozone interest rates "may rise further, may also pause", will work to bring inflation back to the 2% target level. However, some eurozone members are concerned that higher interest rates could lead to further recession.

It is to be expected that the dilemma of inflation versus growth will continue to bedevil European policymakers. At the same time, geopolitical conflicts, the Federal Reserve monetary policy and other factors will also bring uncertainties to the European economic outlook.