Eurozone economic growth saw an uptick in Q3, though the overall outlook remains bleak
The eurozone economy expanded more than expected in the third quarter, with GDP growth reaching 0.4%, up from 0.2% in the previous quarter and beating forecasts of 0.2%. Despite this growth, underlying issues such as stagnation in the industrial sector and weak household spending highlight the fragility of the recovery.
On an annualized basis, growth rose to 0.9%, approaching a yearly rate of around 1%, still below the region’s natural growth potential without significant economic shocks or intervention.
Among member states, Germany posted modest growth of 0.2%, supported by increased public and private consumption, a result that surpassed the expectations of officials who had feared a recession, particularly given the ongoing challenges in Germany’s key industrial sectors, especially automotive. However, Germany continues to face stagnation, with officials suggesting subdued growth could persist through 2025. France and Spain also showed resilience, contributing to stronger-than-anticipated regional growth, although the eurozone continues to lag behind the U.S., where annual growth is projected at 3.0%, driven by robust consumer spending and substantial government support.
The eurozone’s dependence on open trade poses additional risks in the face of potential U.S. trade policy shifts. U.S. presidential candidate Donald Trump has proposed high tariffs, including a 10% general import duty and a 60% tariff on Chinese goods, which could have significant implications for Europe if implemented. This could lead to retaliatory tariffs and higher trade costs, impacting global trade—a critical growth component for the eurozone. Tensions have already escalated with the EU’s recent imposition of up to 45.3% tariffs on Chinese-made electric vehicles, creating friction with China.
Further compounding challenges are high energy costs from the Ukraine conflict and changes in automotive demand, weighing heavily on Europe’s industrial core, particularly Germany. Volkswagen’s recent 42% drop in operating profits, tied to poor performance in its core car division and rising costs, reflects these pressures, as does the European Commission’s sentiment survey, which recorded a decline in economic confidence.
In response, the European Central Bank (ECB) is expected to proceed with its gradual rate cut trajectory. Current data has lessened the likelihood of a significant 50-basis-point cut in December, with markets now anticipating more modest 25-basis-point reductions as the ECB aims to balance inflation control with the need to support growth amid mounting economic risks.
