World Stock Watch

Euro Zone Economy Defies Expectations with 0.4% Growth

The euro zone economy has surprised economists with a 0.4% growth in the third quarter, exceeding expectations of 0.2%. This growth is a welcome boost to the region, which had experienced a slowdown in the previous quarter.

Spain and Ireland Lead the Way

Spain saw one of the highest growth rates, increasing 0.8% on the previous quarter, while Ireland rose 2%. This growth is attributed to the high proportion of international corporations stationed in Ireland.

Germany Avoids Recession

Germany, the euro zone’s largest economy, recorded a surprise growth of 0.2% in the third quarter, avoiding the recession that had been forecast by some economists. However, analysts at ING noted that the German economy remains barely larger than it was at the start of the pandemic.

Interest Rates and Inflation

The European Central Bank (ECB) cut interest rates for the third time this year in October, citing persistent signs of weak activity in the euro area. Markets have fully priced another 25-basis-point cut from the ECB in its last meeting of the year in December.

Future Outlook

Analysts say euro zone business activity and consumer confidence should cautiously pick up in the coming months, amid lower interest rates and cooling inflation. However, some ECB policymakers have acknowledged that they may soon have to grapple with the ECB’s pre-Covid-19 issue of inflation that is persistently below the institution’s 2% target.

Rate Cut Expected

Franziska Palmas, senior Europe economist at Capital Economics, said stronger-than-expected growth would not deter the ECB from a December rate cut and forecast a reduction of 50 basis points. However, Kamil Kovar, senior economist at Moody’s Analytics, said the latest GDP figures would be followed by an uptick in headline inflation which would “shut down any talk about a jumbo sized cut.”

Conclusion

The euro zone economy has defied expectations with a 0.4% growth in the third quarter, led by Spain and Ireland. While Germany avoided recession, its economy remains barely larger than it was at the start of the pandemic. The ECB is expected to cut interest rates again in December, but the size of the cut is uncertain.