Growth in the euro zone fell unexpectedly this summer as rising interest rates weakened momentum in Germany and France, the region’s two largest economies, the European statistics agency reported on Tuesday.
The downturn reflected the challenges facing policymakers at the European Central Bank, which last week paused its campaign to raise interest rates to combat inflation due to signs of a slowdown in the region’s economy. Data showed the euro zone’s inflation rate fell to 2.9 percent in October, another sign of the impact of the central bank’s higher interest rates.
Economic output in the 20 countries that use the euro fell 0.1 percent between July and September, erasing a slight gain in growth in the second quarter and extending nearly a year of subdued economic activity. Compared to the previous year, economic growth only increased by 0.1 percent.
Europe’s anemic pace of growth stands in stark contrast to the United States, where the economy has rebounded despite a sharp interest rate hike by the Federal Reserve to curb inflation. Gross domestic product grew 1.2 percent between the second and third quarters, driven by huge consumer spending and easing inflation that boosted purchasing power.
As Europe’s economy weakens, there is no sharp recession in sight, analysts at ING Bank said in a note to clients. “Nevertheless, ongoing economic and geopolitical uncertainty as well as the impact of higher interest rates on the economy will weigh on economic activity in the coming quarters,” the bank said.
The ECB has been raising interest rates almost in lockstep with the Fed to combat skyrocketing inflation stemming from Russia’s war in Ukraine. Earlier this month, the ECB paused as there were signs the fight was starting to pay off.
On Tuesday, the statistics agency said in a separate press release that consumer prices in the euro zone rose 2.9 percent in the year to October, compared with 4.3 percent in the previous month and the lowest level since July 2021. However, well below double digits Gains A year ago, inflation remained high in Europe overall, particularly in food and energy, making consumers cautious about spending.
And these high interest rates have also slowed household and business activity by driving up borrowing rates. In some cases they increased the pain on existing problems.
Germany, Europe’s largest economy, shrank 0.1 percent in the third quarter. The country’s energy-intensive industrial sector continues to suffer from a price shock following the disruption of natural gas flows from Russia to Germany, which has pushed up inflation and curbed consumer spending.
The French economy also lost momentum and grew by 0.1 percent after a growth spurt in the second quarter. Consumers increased their spending, but the slowdown in the global economy weighed on French manufacturers, who suffered a decline in demand for their exports. Growth also stagnated in Italy.
The euro zone’s overall performance was distorted to some extent by a dramatic fall in growth figures for Ireland, a major pharmaceutical exporter, where pharmaceutical exports have fallen since the end of the pandemic lockdowns. Growth in Ireland fell by 1.8 percent in the summer compared to the previous quarter.
However, growth in Europe remains subdued and is finding it difficult to recover from the stagnation at the start of the year. In a briefing this month, the International Monetary Fund said Europe was “at a tipping point.” The region has weathered a series of shocks, including the pandemic and the energy crisis triggered by Russia’s invasion of Ukraine.
More people have jobs and wages have risen to keep up with inflation. But food and energy prices remain relatively high – a risk that will likely continue to weigh on growth, the IMF said.