Eurozone economy outperforms expectations, strengthening case for ECB rate hike

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Eurozone GDP grows 0.4%

Highlights

Eurozone GDP grows 0.4% in Q3.
Employment remains unchanged.
ECB weighs another December rate hike.

Gross domestic product across the 21-country currency bloc grew 0.4% from the previous quarter, confirming the initial estimate published in October, according to Eurostat. Growth was twice the pace economists had initially forecast, although it slowed from 0.6% in the second quarter.

Economic growth varies across Europe

The broader European Union economy expanded 0.5% in the third quarter, following 0.7% growth in the preceding three months. Compared with a year earlier, output increased 1.3% in the Eurozone and 1.5% across the EU, indicating continued expansion despite the economic disruption caused by the Iran war.

Performance differed considerably among major economies. Germany recorded quarterly growth of just 0.2%, while France contracted 0.1% and Italy stagnated. Spain and the Netherlands each expanded 0.6%, helping offset weakness elsewhere.

Ireland reported a 5.5% increase, although its preliminary figures are subject to particular uncertainty because of incomplete underlying data.

Employment offered a less encouraging signal. The number of people employed remained unchanged across both the Eurozone and the EU during the quarter, following modest increases of 0.1% in the previous three months.

ECB faces renewed pressure to raise rates

The ECB has increased borrowing costs twice since the conflict involving Iran drove energy prices sharply higher. With inflation running at approximately twice the central bank's 2% target, officials are considering another increase at their December meeting.

Bundesbank President Joachim Nagel has indicated that policymakers may need to restrict economic activity more deliberately to bring inflation under control.

An additional quarter-percentage-point increase would move the ECB deposit rate toward the upper boundary of the range considered neutral for economic growth.

The central bank nevertheless faces competing risks. Higher energy costs could sustain inflation, while rising government bond yields and tighter financing conditions threaten to weaken investment and household spending.

Resilient economy gives ECB room to act

The third-quarter figures suggest that the Eurozone has absorbed the initial impact of higher borrowing costs without slipping into recession. However, the slowdown from 0.6% to 0.4%, combined with stagnant employment, points to limits on that resilience.

For financial markets, the December ECB decision will depend on whether persistent inflation outweighs signs of weakening activity. Eurostat's next GDP estimates, scheduled for December 7, will provide another assessment of the economy as policymakers consider further tightening.

As we previously reported, the ECB signals a possible December rate hike in Eurozone.

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