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Eurozone GDP Shrinks Unexpectedly; Inflation Lowest In More Than 2 Years

The unexpected contraction in the euro area economy during the third quarter as well as inflation slowing to a more than two-year low in November reflects the impact of the aggressive monetary policy tightening stance adopted by the European Central Bank so far but the stage is still not set for a rate cut as inflation is forecast to stay “higher for longer”.

Gross domestic product registered a quarterly contraction of 0.1 percent in the third quarter, in contrast to the 0.2 percent expansion in the second quarter, Eurostat said in its preliminary flash estimate, released Tuesday.

The single currency bloc was expected to stagnate.

Year-on-year growth eased to 0.1 percent from 0.5 percent in the second quarter. This was also weaker than economists’ forecast of 0.2 percent.

A technical recession is certainly possible in the second half of this year on the back of the third-quarter GDP reading and a weak start to the quarter, ING economist Bert Colijn said.

Although no sharp recession is in sight, continued economic and geopolitical uncertainty alongside the impact of higher rates on the economy will weigh on economic activity in the coming quarters, the economist added.

Capital Economics economist Jack Allen-Reynolds said the big picture is that the euro-zone is struggling.

“Whether or not the euro-zone suffers a technical recession, we expect the economy to remain sluggish in the fourth quarter and beyond,” the economist added.

The International Monetary Fund has forecast the euro area to grow 0.7 percent this year and 1.2 percent in 2024.

Data showed that all big four economies except Spain remained notably weak in the third quarter.

Germany’s economic output shrank 0.1 percent in the third quarter, offsetting a 0.1 percent rise a quarter ago. Household spending was lower in the biggest euro area economy, while positive contributions came from gross fixed capital formation in machinery and equipment.

Driven by household spending, the Spanish economy expanded 0.3 percent. Still this was slightly slower than the second quarter’s 0.4 percent expansion.

Despite the strength in household spending and investment, France’s GDP grew only 0.1 percent after rising 0.6 percent a quarter ago. At the same time, Italy’s GDP stagnated after shrinking 0.4 percent in the second quarter.

Elsewhere, flash estimate showed that Eurozone inflation eased to 2.9 percent in October, the weakest since July 2021, due to a sharp decrease in energy prices. Harmonized inflation was forecast to slow to 3.1 percent from 4.3 percent in September. Excluding energy, food, alcohol and tobacco, core inflation softened to 4.2 percent, as expected, from 4.5 percent a month ago.

Energy prices registered an annual decrease of 11.1 percent and all other three components of the HICP posted slightly slower increases. The annual growth in food, alcohol and tobacco prices slowed to 7.5 percent from 8.8 percent and non-energy industrial goods inflation weakened to 3.5 percent from 4.1 percent. Services cost moved up 4.6 percent, following September’s 4.7 percent gain.

On a monthly basis, the HICP edged up 0.1 percent in October. Final data is due on November 17.

After hiking interest rates in every policy session of the current tightening cycle that began in July last year, the ECB finally paused the rates in October.

The ECB geared up tightening to rein in the runaway inflation after the energy crisis hit the bloc following the war in Ukraine.

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