(Bloomberg) -- The euro area’s economy expanded more strongly than expected in the third quarter — with even Germany avoiding the recession it was widely tipped to endure.
Growth in the 20-nation currency bloc quickened to 0.4%, while economists had predicted it would hold steady at 0.2%, as momentum in France accelerated and stayed strong in Spain. Germany’s surprise 0.2% increase in gross domestic product caught analysts off guard, though the reading for the previous three months was revised down sharply.
The weak point was Italy, where output was unexpectedly flat, driven by a negative contribution from net trade.
On the inflation front, separate data from Spain showed consumer-price gains accelerating a touch to 1.8% but remaining inside the European Central Bank’s 2% target. German figures due later today are likely to also show an uptick, with euro-area wide numbers scheduled for Thursday.
Wednesday’s data may ease some of the concerns about Europe’s economy that were on display last week when finance officials gathered in Washington for the International Monetary Fund’s meetings. A few ECB policymakers argued that a worsening outlook may necessitate heftier interest-rate cuts, while others urged caution.
The surprisingly strong growth numbers might support arguments to maintain a gradual pace of easing and stick with traditional quarter-point reductions in borrowing costs. Traders pared bets on ECB rate cuts after the data barrage, pricing around a 25% chance of a half-point cut in December. Earlier this month, the implied probability was 50%, according to swap pricing.
What Bloomberg Economics Says...
“The strong pace of expansion for the euro-area economy in the third quarter should temper expectations for a 50-basis-point cut in December. However, with growth likely to slow in the fourth quarter, downside risks to the outlook rising and the disinflation process well advanced, the Governing Council remains firmly on track for another 25-bp move this year.”
—David Powell, senior economist. For full react, click here
The biggest worries have centered on Germany, whose manufacturing sector is grappling with a loss of competitiveness that executives blame on high energy costs, excessive regulation and shortages of skilled staff. The uncertainty has led consumers to ramp up savings instead of spending the pay rises they received in recent months.
That may be starting to change, however, with the country’s statistics office highlighting higher household and government consumption as reasons for third-quarter growth.
Germany’s failure to sustain momentum is meanwhile having a growing impact on its labor market, which had long remained resilient. Joblessness rose by 27,000 in October, while economists had expected an increase of just 15,000. The unemployment rate held at 6.1%.
Countries with a bigger focus on services have fared better of late. In October, private-sector output even increased at a faster pace outside of France and Germany, according to business surveys by S&P Global.
The Olympics temporarily allowed France to paper over underlying weakness that’s weighing on the country’s finances. Like in Spain, household consumption and public spending were the main drivers.
Austria eked out a 0.3% expansion, the most in two years, helped by a rebound in consumption, while Portuguese and Lithuanian GDP growth quickened.
France’s economic improvement offers relief for the government, which faces swollen budget deficits that are undermining investor confidence. With borrowing costs rising relative to European peers, Prime Minister Michel Barnier is trying to push unpopular spending cuts and tax increases through a parliament where he lacks a majority.
What Bloomberg Economics Says...
“The unexpected GDP uptick in the third quarter doesn’t change our assessment that Germany’s economy struggles to regain footing and 2024 will be yet another lost year of growth. A slight improvement in business sentiment gives some additional hope that the trough may be behind and GDP will expand further in the coming quarters.”
—Martin Ademmer, economist. For full react, click here
While firmer economic expansion this year is a boon for President Emmanuel Macron, drilling down into the data shows investment dropped 0.8% in the period. Separate figures showed growth in consumer spending slowed in September. Persistent weakness in those areas is a key factor behind plunging tax receipts that are further stretching public finances.
The wider consequences of that pressure are becoming evident. Consumer confidence unexpectedly dipped for the first time since April this month, with households gloomier on future living standards and unemployment becoming a bigger concern.
--With assistance from Mark Evans, Joao Lima, Constantine Courcoulas, Jana Randow, Mark Schroers, Barbara Sladkowska, Simon Lee, Kristian Siedenburg, Donato Paolo Mancini, Giovanni Salzano, Rodrigo Orihuela, Marton Eder and Joel Rinneby.
(Updates with BE after sixth paragraph)
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