German Cooling, Italy Rebound Keep Euro-Area Growth at 0.3%

Euro-Area Economy
  • German Cooling, Italy Rebound Keep Euro-Area Growth at 0.3%

German economic growth slowed to the weakest pace in a year last quarter, a reminder of the fragility of the euro area’s recovery in a time of rising uncertainty.

The slowdown in Germany to 0.2 percent, along with a resumption of growth in Italy and France, left expansion in the 19-nation currency region at 0.3 percent, in line with an initial estimate and matching the pace of the three months through June.

As Europe’s biggest economy, Germany’s fortunes are key to the recovery of the euro region, where the economy’s expansion is stuck at mediocre levels. That backdrop will color the European Central Bank’s review of its stimulus program in less than four weeks, when it will also have to factor in a global outlook characterized by the rise of populists critical of international trade deals.

“The economy is growing in the euro area but still not quite helping the ECB meet its price-growth target of 2 percent,” said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. “It’s probably not enough to satisfy them, and we think they will have to extend stimulus in December.”

Economists forecast that the euro area will maintain its current pace of growth through the first half of 2017, then see a slight pickup to 0.4 percent.

Germany’s growth in the third quarter marked a slowdown from 0.4 percent and fell short of the median forecast of economists. Italy’s economy, the euro region’s third largest, grew 0.3 percent, resuming expansion after stagnation in the three months through June. In the Netherlands, growth was unchanged from the previous quarter at 0.7 percent. Previously published figures put French growth at 0.2 percent.

Domestic Demand

In Germany, domestic demand drove growth last quarter as both government and private consumption spending rose, the statistics office said. The global economy dragged on growth, with exports contracting slightly. Investment in equipment also slipped while construction climbed.

The Bundesbank has already noted that the economy cooled in the summer months — a phase it said was probably temporary — and recent data has showed a pickup in momentum. Business confidence rose to the highest level in more than two years and unemployment dropped to a record low. A separate report on Tuesday showed the ZEW German investor confidence rising more than estimated in November.

Even so, risks may be mounting. Donald Trump won the U.S. presidential election on a platform that included a pledge to renegotiate or cancel trade deals, and the U.K. looks on track for a hard exit from the European Union and its single market.

Bundesbank President Jens Weidmann said in a speech after Trump’s election that “pronounced political uncertainty” was weighing on growth prospects, raising the “question of how much protectionism and isolationism will determine the future political agenda.” On Monday, ECB Vice President Vitor Constancio said the world economy “faces once again an abnormal degree of uncertainty.”

ZEW noted in its survey of investors that responses after the U.S. vote were less optimistic than earlier ones.

“The election of Donald Trump as U.S. president and the resulting political and economic uncertainties, however, have made an impact,” ZEW President Achim Wambach said in a statement. “After the election, the economic sentiment has been less positive than before.”

The ECB’s Governing Council will meet on Dec. 8 to decide whether to extend its program to buy 80 billion euros ($86 billion) a month of debt through March. The Frankfurt-based central bank will also publish fresh economic forecasts that extend to 2019.

The European Commission cut its 2017 projections for the euro area last week, to 1.5 percent from 1.8 percent seen in May. It also warned of instability caused by Brexit and the surge of anti-globalization and populism around the world.

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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