Eurozone’s third-quarter growth surge could prove to be an illusion

The eurozone grew by a more-than-expected at 0.4% quarter-on-quarter in the third quarter. That was the strongest quarterly growth in two years. However, underlying growth dynamics are weaker than the headline figure suggests.

For starters, there is the extremely volatile Irish contribution caused by the accounting practices of multinationals based in Ireland, which added 0.1 percentage point to eurozone growth. And French GDP received a significant boost from the Olympics, something that will not be repeated in the fourth quarter.

The unexpected 0.2% growth in Germany was mainly driven by government expenditure and household consumption, as well as the downward revision of second-quarter growth. But worsening job perspectives, highlighted by the announced closure of three German Volkswagen factories, and ongoing policy uncertainty, might dampen German household consumption growth in the coming quarters.

The fourth quarter started with rather muted sentiment data. The PMI composite increased marginally but remained in contraction territory, while the European Commission’s sentiment indicator fell in October. The inventory correction in manufacturing is still ongoing, with orders declining.

At the same time, the growth pace in services is softening. On the positive side, there is improving confidence in the retail sector, a sign that, for the time being, households are spending some of the increased real income.

And though it might still take a few months before registering growth, confidence data in the construction sector has been creeping higher for four consecutive months. Nevertheless, we remain convinced that the winter quarter will see little growth, if at all.

Uncertainty stemming from a second Trump presidency regarding upcoming tariffs, deregulation in the US and American support for Ukraine might weigh on eurozone economic sentiment. A winter recession can no longer be excluded.

From the second quarter of 2025 onward, growth might start to pick up gradually. With a likely increase of US import tariffs, net exports are expected to be less of a growth driver in 2026.

On the back of the stronger-than-expected third-quarter growth in 2024, we have had to adjust our growth forecast for this year marginally to 0.7%. For 2025, we keep our 0.6% growth forecast, while we have downgraded our outlook for 2026 from 1.3% to 1.1%.

After the better-than-expected September inflation, October data was a bit disappointing. Headline inflation rose to 2% year-on-year, while core inflation stabilised at 2.7% YoY. Month-on-month service price growth accelerated again.

Of course, we shouldn’t read too much into one month’s data. The trend still seems to be down, though on the back of less supportive base effects headline inflation is expected to increase further over the next two months.

Not that this will come as a surprise for the ECB, as President Christine Lagarde mentioned during the press conference at the last policy meeting that they expected inflation to rise in the short run.

The ECB’s rate cut in October came after the better-than-expected September inflation data and a very weak PMI reading.

The ECB’s focus is now shifting towards sustaining growth. In that regard, it is no surprise that some members of the Governing Council have been pleading for a 50bp rate cut in December.

In normal times, the solid growth figure and eurozone unemployment falling to a record low in September would have discarded this proposal. But on the back of the Trump election, the fear of a negative confidence shock might be sufficient to tilt the balance towards a 50bp cut. Thereafter the ECB is likely to continue with a 25bp rate cut every meeting until the deposit rate reaches 1.75%.