Eurozone economic growth picked up in Q3 but overall picture remains dark

The eurozone’s economy grew more than anticipated in the third quarter, with GDP expanding by 0.4%, an improvement from the previous quarter’s 0.2% growth and above consensus expectations of 0.2%.
However, persistent issues, including industrial sector stagnation and sluggish household spending, underscore the fragile nature of the recovery.
On an annualized basis, growth picked up to 0.9%, edging closer to a full-year pace of around 1%—a rate still below the region’s estimated natural growth level in the absence of shocks or major economic support.

Among member states, Germany managed a slight expansion of 0.2%, buoyed by increased public and private consumption. This exceeded the predictions of many officials who had anticipated a recession due to the ongoing challenges in Germany’s industrial sector, notably the automotive industry.
Despite the positive surprise, Germany remains in a protracted period of stagnation, with officials signaling that growth is likely to remain subdued through 2025.
France and Spain also demonstrated resilience, contributing to the stronger-than-expected regional growth, but the eurozone continues to trail behind the United States, where annual growth is projected to be a robust 3.0%, largely due to strong consumer spending and substantial government expenditure.

The international trade environment presents additional risks for the eurozone. U.S. presidential candidate Donald Trump has proposed steep tariffs, including a 10% general import duty and a 60% tariff on goods from China, which he claims would impact Europe if he wins.
Given Europe’s reliance on open trade, any escalation in tariffs could lead to retaliatory measures, amplifying costs and hindering global trade—a critical growth factor for the eurozone. The trade landscape is already tense following the EU’s decision to impose tariffs of up to 45.3% on Chinese-manufactured electric vehicles, escalating tensions with China.

These headwinds, coupled with persistent energy cost pressures stemming from the Ukraine conflict and demand shifts in the car market, paint a challenging picture for Europe’s industrial core, especially Germany.
The effects of these factors are reflected in reports such as Volkswagen’s 42% drop in operating profits, linked to poor performance in its core car division and high costs, and the European Commission’s sentiment survey, which showed a further deterioration in economic confidence.

The European Central Bank (ECB) is likely to continue its current trajectory of interest rate cuts, with the latest data reducing the likelihood of a large, 50-basis-point cut in December. Instead, markets are expecting more measured 25-basis-point reductions, as the ECB balances managing inflation with supporting growth in the face of heightened economic risks.