Euro-Area Economy Keeps Pace as ECB Mulls Stimulus Extension

(Bloomberg) -- Euro-area growth stayed its course in the third quarter, a sign the European Central Bank's efforts to revive the economy have borne fruit even in the face of inadequate structural reforms.

Gross domestic product rose 0.3 percent in the three months to September, according to an initial estimate published by the European Union's statistics office on Monday. That follows an expansion 0.3 percent in the previous quarter and matches the forecast in a Bloomberg survey of economists. The inflation rate picked up to 0.5 percent in October, a separate report showed.

The GDP data offer a snapshot of the bloc's economic health following Britain's vote to leave the European Union -- an event that ECB officials say significantly increased downside risks to the growth outlook. The central bank has bought more than a trillion euros of assets to underpin the recovery and stoke price pressures, and increased calls for governments to step up their efforts to boost potential output.

“I don't think the ECB can do a lot more to generate growth,” said Holger Sandte, chief European economist at Nordea Markets in Copenhagen. “They used rather big hammers in the past and I don't think there is the inclination to use such big hammers down the road.”

The euro-area economy has shown few signs of suffering due to the June Brexit referendum aside from a short gust of uncertainty. Economic confidence in the region rose to a 10-month high in October, and a closely-watched gauge of manufacturing and service-sector activity indicated momentum within the bloc accelerated to its fastest pace this year.

Italy Referendum

The French economy returned to growth in the July-September period, although the rate of expansion was weaker than analysts predicted. Spain shrugged off a political impasse and continued to outperform its neighbors, with GDP increasing at a 0.7 percent pace, slightly less than in the previous quarter.

Italy is still five weeks away from a referendum that Prime Minister Matteo Renzi says is needed to streamline government, leaving a cloud of uncertainty hanging over economic prospects. As for Germany, the region's largest member, data on business sentiment, export expectations and economic activity suggest it is poised for faster growth toward the end of the year. Third-quarter GDP for both countries will be published on Nov. 15.

The U.K. economy appears so far to have defied the effect of Brexit, though economists still expect it to slow next year.

“You have differences between various countries, with France not exactly hot out of the starting blocks and Spain having cooled a bit, but that's natural,” said David Milleker, chief economist at Union Investment Privatfonds in Frankfurt. “There will always be a need to do reforms,” he said, adding that some might be desirable but politically unfeasible.

Populism is on the rise in the 19-nation region and voters in 75 percent of the economies are set to cast ballots by late 2017 in presidential or parliamentary elections, as well as a referendum on constitutional reform. 

Policy makers including Executive Board member Benoit Coeure have warned that the euro area can't afford any further delays in improving its economic potential and strengthening its institutional set-up.

“Postponing the necessary reforms is not a valid option anymore,” he said in a speech in Frankfurt on Friday. “Procrastination and forbearance have not served the euro area well.”

With the region's slow-but-steady recovery on its way and inflation showing signs of finally picking up, policy makers are considering whether and how to extend their bond-purchase program beyond its scheduled end in March. The ECB is currently buying 80 billion euros ($88 billion) a month of public and private-sector assets.

Consumer prices rose by an annual 0.5 percent in October from 0.4 percent the previous month, Eurostat data also published on Monday showed. That compares with a median estimate for an increase of 0.5 percent in a Bloomberg survey of economists. The ECB's goal is for a rate close to but below 2 percent. The core inflation rate, which strips out volatile elements such as food and energy, held at 0.8 percent.

“The narrative of the euro area is that there's been this moderate but sustained recovery, by and large driven by domestic factors, especially consumption,” Irish central bank Governor Philip Lane said in a speech in London last week. “But inflation remains low compared to target and essentially that's the assessment,” adding that March was always an “intermediate staging post” for the ECB in its monetary policy.

--With assistance from Andre Tartar and Kristian Siedenburg To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net. To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow, Zoe Schneeweiss