The euro zone economy expanded more strongly than expected in the third quarter, avoiding the recession that even Germany was widely expected to endure.
Growth in the 20-nation currency bloc accelerated to 0.4%, but economists had expected it to stabilize at 0.2% as France’s momentum picks up and Spain remains strong. Germany’s surprise 0.2% rise in gross domestic product caught analysts by surprise, but the figures for the past three months have been revised down significantly.
The weak spot was Italy, where production was unexpectedly flat due to the negative contribution of net trade.
On the inflation front, separate data from Spain shows that consumer price inflation has accelerated slightly to 1.8%, but remains within the European Central Bank’s 2% target. German figures due later today are also likely to show an increase, with eurozone-wide figures due on Thursday.
Wednesday’s figures could allay some of the concerns about Europe’s economy that were expressed last week as finance officials gathered in Washington for a meeting of the International Monetary Fund. Several ECB policymakers said the deteriorating outlook could necessitate a significant rate cut, while others were cautious.
The surprisingly strong growth numbers could support the argument for maintaining a modest pace of easing and sticking with the previous quarter-point reduction in borrowing costs. After the barrage of data, traders stopped betting on an ECB rate cut, pricing in around a 25% chance of a 0.5 percentage point cut in December. Earlier this month, the implied probability was 50%, according to swap prices. The biggest concerns center on Germany, where its manufacturing industry faces declining competitiveness, which executives blame on high energy costs, overregulation and a lack of skilled staff. Uncertainty is prompting consumers to save more of the raises they’ve received in recent months instead of spending them. However, things may be starting to change, with the country’s statistics agency highlighting increased household and government consumption as the reason for growth in the third quarter.
