The eurozone economy is not dead (yet)

The eurozone economy showed surprising strength in the third quarter, defying the narrative that the bloc is heading for a protracted slowdown.

The eurozone’s gross domestic product (GDP) grew by 0.4 percent between July and September, beating an analyst consensus of 0.2 percent, according to preliminary estimates published by the European Union’s statistics agency. That represents an acceleration from 0.2 percent in the previous quarter.

Concerns over the health of the economy intensified over the summer, amid signs of a sharp slowdown in manufacturing. Such fears, along with a marked drop in inflation, have since led the European Central Bank (ECB) to step up the pace of interest rate cuts to provide relief to the economy.

The ECB has repeatedly argued that consumer spending would increasingly support growth, against a backdrop of slowing inflation and rising real incomes, and it’s likely to take the news as vindicating that argument.

At the national level, Germany, Spain and France posted better-than-expected growth, while Italy’s came in below expectations. Ireland performed best, growing 2 percent, while Spain grew a robust 0.8 percent. That was helped by a sharp increase in tourist arrivals, a reflection of the ongoing strength of “revenge spending” on travel since the end of the pandemic. In the first eight months of the year, Spain received more than 64 million tourists, according to the country’s statistics agency, the highest figure since records began.

The French economy also showed surprising vitality, growing by 0.4 percent, mostly thanks to additional activity generated by the Olympic Games in August. By contrast, Italy didn’t grow at all, due to a pronounced slump in manufacturing.

Germany grew by 0.2 percent in the quarter, confounding expectations of a small contraction. Statistics agency Destatis attributed that to strong public and private consumption. The latter has been hard to track this year as the country hasn’t published any retail sales data since the spring. But the latest data on consumer sentiment appears to corroborate Destatis’ picture: The forward-looking GfK index for November, released on Tuesday, hit its highest level since April 2022. Both income expectations and, crucially, the willingness to buy improved for the second month in a row.

However, the German surprise was offset by a big downward revision of its second-quarter data to show a contraction by 0.3 percent, which was more consistent with the sustained weakness of data on industrial production and orders during that time.

Berenberg Bank chief economist Holger Schmieding warned clients not to be too carried away. Structural headwinds, such as demographics and excessive taxation and regulation will keep German growth “very subdued in the absence of major policy changes,” he said. In the same vein, he described the French numbers as “a flash in the pan.”

Germany sits at the heart of the continent’s manufacturing sector, and the effects of its underperformance were visible in the numbers published by neighboring countries that are tightly integrated into its supply chains. Both Hungary and Sweden contracted in the third quarter by 0.7 percent and 0.1 percent, while the Czech economy grew by less than expected, at only 0.3 percent.

Including also the noneuro countries, the EU economy as a whole grew by 0.3 percent, unchanged from the second quarter.