The euro zone economy grew by 0.4% in the third quarter, slowing from 0.6% in the previous quarter, as France unexpectedly contracted and Germany posted weak growth, according to flash data from Eurostat released on Friday.
The 21-nation euro area's third-quarter reading beat the 0.2% growth forecast in a Reuters poll of economists, but the bloc's largest economy, Germany, grew just 0.2%, and Italy's growth was flat. France's economy contracted by 0.1% over the July-to-September period. The country is grappling with soaring borrowing costs as investors balk at a political struggle to reduce its high budget deficit and mounting national debt. October has also brought growing nationwide unrest over the cost of living and other issues, which has at times escalated into violent and costly rioting.
Spain grew by 0.6%, continuing to outpace the euro area average on the back of labor market productivity, a healthy tourism industry, domestic demand, and a relatively strong fiscal position, though the country has been rocked by mass protests over cost pressures and housing that led to a snap election being called for next month. Ireland recorded 5.5% growth, though its headline GDP figures are highly volatile and subject to revision due to the large number of multinationals stationed in the country but doing business outside it.
Joe Nellis, head of economic research at accountancy MHA, said the euro area is "showing unexpected resilience against a backdrop of considerable economic and geopolitical uncertainty," but cautioned that this may mask longstanding structural challenges, including weak productivity growth and investment expenditure, demographic pressures, and declining industrial competitiveness. He added that the outlook for 2027 is complicated by the prospect of further inflationary pressures, saying: "Unless the Middle East crisis is resolved in the very near future, energy and transportation costs will continue to rise, putting even more pressure on the cost of living and household finances at a time when consumer confidence is weak."
The European Central Bank voted to hold interest rates steady on Thursday, saying a shock from higher energy prices was not yet feeding into second-round effects in the wider economy. However, analysts said the ECB may still opt for one more rate hike in December as energy costs remain elevated, and the central bank said downside risks to growth had increased.
Analysis
Why this matters
- The slowdown in euro zone growth, and particularly France's contraction, signals mounting economic strain in the bloc's major economies, which could affect global trade and financial markets.
- Persistently high energy costs and the unresolved Middle East crisis threaten to push up inflation, squeezing household finances and consumer confidence across Europe.
- The ECB's decision to hold rates, with a possible hike in December, will influence borrowing costs for businesses and consumers across the euro area.
Background
The euro zone has faced a year of uneven growth: stagnation in the first quarter, a rebound to 0.6% in the second, and now a slowdown to 0.4% in the third. Political turmoil in France over budget deficits and debt, as well as nationwide protests over the cost of living, have weighed on its economy, while Spain has outperformed despite its own protests and a snap election. Energy prices and geopolitical uncertainty remain key risks.
Key perspectives
- Joe Nellis (MHA): Calls the euro area's performance 'unexpected resilience' but warns of structural challenges and sees the 2027 outlook complicated by inflation and the Middle East crisis.
- European Central Bank: Held interest rates steady, saying the energy price shock is not yet feeding into second-round effects, while acknowledging increased downside risks to growth.
- Analysts (unnamed): Suggest the ECB may still raise rates in December as energy costs remain elevated.
What to watch
- Whether the ECB moves to hike rates at its December meeting, and how that affects growth and inflation expectations.
- France's fiscal and political situation: whether the government can address its budget deficit and whether unrest subsides, as the country's contraction deepens.
- Spain's snap election next month and its potential impact on the country's economic momentum amid protests.
Checked
12 claims in this story checked against 1 source: 11 supported.
Show each claim
- SupportedEuro zone growth slowed to 0.4% in Q3 as France contracted.Economy: “Economic expansion in the euro zone slowed to 0.4% in the third quarter, statistics agency Eurostat said on Friday. ... France's economy unexpectedly contracted by 0.1% over the July to September period.”
- SupportedNellis said the euro area was showing “unexpected resilience.”Economy: “The euro area is "showing unexpected resilience against a backdrop of considerable economic and geopolitical uncertainty," Joe Nellis, head of economic research at accountancy MHA, said.”
- SupportedThe ECB held interest rates steady on Thursday.Economy: “The European Central Bank voted to hold interest rates steady on Thursday”
- SupportedEuro zone growth was 0.4% in Q3, down from 0.6% in Q2.Economy: “Economic expansion in the euro zone slowed to 0.4% in the third quarter ... The 21-nation euro area rebounded to 0.6% growth in the second quarter”
- SupportedThe Q3 reading beat the 0.2% growth forecast in a Reuters poll of economists.Economy: “The flash third quarter reading was nonetheless higher than the 0.2% growth that was forecast in a Reuters poll of economists.”
- SupportedGermany grew by 0.2% and Italy's growth was flat.Economy: “Germany, the euro zone's largest economy, grew by just 0.2% in the third quarter. Growth in the bloc's third-biggest economy, Italy, was flat.”
- Partly supportedSpain grew by 0.6% and continued to outpace the euro area average, with labor market productivity, tourism, domestic demand and its fiscal position cited as factors.Economy: “The country continues to outpace the euro area average amid labor market productivity, a healthy tourism industry and domestic demand, and a relatively strong fiscal position.”
- SupportedIreland recorded 5.5% growth, but its headline GDP figures are volatile and subject to revision because of multinationals doing business outside the country.Economy: “Ireland recorded 5.5% growth, though its headline GDP figures are highly volatile and subject to revision due to the large number of multinationals stationed in the country but doing business outside of it.”
- SupportedNellis said the euro area may be masking longstanding structural challenges, including weak productivity and investment, demographic pressures and declining industrial competitiveness.Economy: “However, he cautioned that this may be masking longstanding structural challenges, including weak productivity growth and investment expenditure, demographic pressures and declining industrial competitiveness.”
- SupportedNellis said the outlook for 2027 was complicated by possible further inflationary pressures.Economy: “"The outlook for 2027 is complicated by the prospect of further inflationary pressures.”
- SupportedNellis said that unless the Middle East crisis was resolved soon, energy and transportation costs would continue to rise and add pressure to household finances while consumer confidence was weak.Economy: “Unless the Middle East crisis is resolved in the very near future, energy and transportation costs will continue to rise, putting even more pressure on the cost of living and household finances at a time when consumer confidence is weak.”
- SupportedThe ECB said higher energy prices were not yet feeding into second-round effects in the wider economy, while analysts said it might still raise rates once in December and the bank said downside risks to growth had increased.Economy: “The European Central Bank voted to hold interest rates steady on Thursday, saying a shock from higher energy prices was not yet feeding into second-round effects in the wider economy. But analysts said the ECB may still opt for one more rate hike in December as energy costs remain elevated. The central bank also said that downside risks to growth had increased.”