Following six consecutive months of contraction, the eurozone successfully returned to growth in Q2 this year, with GDP increasing at a better-than-expected rate of +0.3% quarter-on-quarter (QoQ).

Bearing in mind other recently-improved economic indicators, several commentators have concluded that a true economic recovery in the eurozone is on its way.

This idea of a clear economic rebound, however, stands on shaky legs. In fact, temporary factors can explain a substantial part of the growth – particularly in the eurozone’s two biggest economies.

Germany’s growth (+0.7% QoQ) can be attributed to a weather-related boost in construction activity, while France’s (+0.5% QoQ) was driven by a build-up in business inventories.

Furthermore, Italy, Spain and the Netherlands – together accounting for approximately one third of eurozone output – are still in recession.

True, financial tensions were eased somewhat last July when the ECB announced its Outright Monetary Transactions bond buying programme.

But, importantly, these trends did not lead to substantial easing in credit standards for firms. Interest rates on loans to non-financial corporations have since diverged considerably, especially for small and medium sized enterprises (SMEs), which means monetary policy aims are being undermined.

Moreover, on the back of the Fed’s impending tapering decision, money-market rates and sovereign bonds yields have risen markedly in recent months – meaning further credit tightening could be ahead.

Forward guidance

In order to contain market expectations of rising interest rates in Europe, the ECB introduced ‘forward guidance’ in July this year, stating that “key ECB interest rates [will] remain at present or lower levels for an extend period of time”. Yet, eurozone yields still gained momentum.

Of further concern are the early repayments of longer-term refinancing operation (LTRO) borrowings by banks, as this trend leads to a fall in excess liquidity – thereby contributing to an overall tightening in monetary conditions.

Against this backdrop, one can conclude a clear rebound of activity in the whole eurozone will hinge on the ECB’s ability to prevent premature tightening of monetary conditions in the coming months.

Meanwhile, the balance sheet adjustment of households and firms continues to weigh on the eurozone’s recovery. A bleak labour market adds to this picture, as it may lead to subdued consumer spending.

Although we previously forecast external trade to be an important driver of overall growth, foreign demand is fluctuating around levels not consistent with a significant boost for eurozone growth.

In addition, the emerging market is slowing – triggered by the sudden capital outflows as a result of the Fed’s tapering talks. This may threaten global growth prospects and thereby pose a risk to the eurozone’s recovery.

Moreover, the recent hike in the oil price due to the news flow from Syria added to the downside risks of the economic outlook for the eurozone.

Stabilisation, not true recovery

All of this should indicate that the eurozone is by no means on track for a true recovery. Indeed, there are several factors preventing a clear rebound in economic activity. So rather than boast too loudly of economic improvement, we should perhaps lower expectations to a mere stabilisation of eurozone growth.

Johannes Gareis is an economist at french investment bank, Natixis.