(Bloomberg) -- Private consumption in the euro area jumped by the most in two years in the third quarter, offering hope that shoppers are finally starting to power an economic recovery.
Household expenditure increased 0.7% from the previous three months, while investments advanced by 2%, Eurostat said Friday. Trade was a drag, leaving overall growth at 0.4% — as reported in an initial estimate.
Europe has long been expecting a boost from consumers as incomes grow, inflation cools and interest rates fall. Price growth temporarily dipped below 2% in September. The European Central Bank expects it to durably meet that goal in 2025.
Wages, meanwhile, have risen strongly following the inflation spike in recent years. Data later Friday from the ECB showed third-quarter compensation per employee rose by 4.4% from a year ago, down from 4.8% in the previous period but still elevated.
That pace is unlikely to last, however, allowing the ECB to lower borrowing costs more quickly. They’re set to cut for a fourth time since June next week, with analysts expecting a series of further reductions until the deposit rate reaches 2%.
A key question is how sustainable the rebound in spending will prove. Business surveys have pointed to flagging momentum in the economy as the services sector begins to suffer alongside manufacturing.
The labor market, which has so far remained resilient to economic weakness, is now showing signs of softening. While unemployment is still stuck at a record low, jobs growth has been easing and industrial firms plan more layoffs.
Germany’s biggest labor union, IG Metall, recently agreed on a deal that economists saw as moderate. ECB Executive Board member Isabel Schnabel told Bloomberg last week that “we can expect a deceleration in wage growth, and the most recent wage negotiations, for example in Germany, were not very strong.”
Officials have also been keeping a close eye on corporate profits and workers’ productivity to get a full sense of euro-area price pressures. Based on hours worked, the latter rose 0.5% from a year ago in the third quarter, Eurostat said.
--With assistance from Barbara Sladkowska and Joel Rinneby.
(Updates with wage data in fourth paragraph.)
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