Euro-Area Economy Puts Up Fight With Better-Than-Forecast Growth

(Bloomberg) --

The euro-area economy performed better than forecast in the third quarter, suggesting some resilience in the face of the industrial slump that has battered Germany, its largest member.

While the pace of growth across the region is sluggish, and surveys paint a worrying picture of business and consumer confidence, so far the situation isn't as bad as some feared. Output in the euro zone increased 0.2%, matching the previous three months and beating the 0.1% estimate. Italy and France both topped expectations, and Spain maintained a relatively solid expansion.

For the European Central Bank, inflation remains a worry though, with the headline rate dropping to 0.7% in October, slipping further from the goal of just below 2%. Core prices showed an unexpected pickup to 1.1%, but remained within the range this year.

Outgoing ECB President Mario Draghi has long warned of the barrage of risks facing the euro area as uncertainty about Brexit and trade tensions take a toll on investment and demand. Households are turning increasingly cautious about spending, which could keep downward pressure on the economy.

What Bloomberg's Economists Say...

“Growth came in slightly above expectations today, but remains a long way below trend for the euro area. If that continues, inflation will change course and the ECB will see its target slip beyond reach. Survey indicators suggest a rebound in the fourth quarter is unlikely, although as uncertainty about Brexit and trade recedes, some stability should return in 2020.”

--Jamie Rush. Read the full EURO-AREA REACT

Germany and its all-important industrial sector have been particularly hard hit. The country is probably already in recession, sending unemployment higher and dragging on overall growth in the region.

Spain offered more positive news, keeping a 0.4% pace in the third quarter. France, less exposed to trade difficulties and more reliant on domestic demand, posted growth of 0.3%. Italy's economy managed only 0.1%, but that was at least slightly better than the stagnation that was forecast.

To help boost inflation, the ECB unleashed a monetary-stimulus package in September that included an interest-rate cut further below zero and a new round of asset purchases.

The decision also set off a debate about what more can be done to rekindle the economy and protect the 11 million jobs created since the height of crisis. Much of the focus has been on fiscal stimulus, with Germany in particular highlighted given the size of its budget surplus.

Draghi used his farewell address this week to tell an audience that included German Chancellor Angela Merkel, French President Emmanuel Macron and Italian Prime Minister Sergio Mattarella that monetary policy would be much more effective if governments helped by implementing fiscal stimulus and structural reforms.

It's a tune Draghi's successor, Christine Lagarde, has already adopted. In an interview with French radio RTL this week, she called on Germany and the Netherlands to use their fiscal surplus and invest in infrastructure, education and innovation in times of “precarious” and “fragile” global growth.

--With assistance from Harumi Ichikura and Kristian Siedenburg.

To contact the reporter on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow

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