Europe’s economy risks a recession after output falls in the third quarter

By Hanna Ziady, CNN

London (CNN) — The euro area economy risks falling into recession later this year after official data Tuesday showed that output shrank slightly in the third quarter.

Gross domestic product across the 20 countries that use the euro fell 0.1% in the July-to-September quarter compared with the previous three months, according to an initial estimate published by Eurostat, the European Union’s statistics office.

The dip follows a rise of only 0.2% in the April-to-June quarter and highlights the fine line between contraction and growth in the eurozone. GDP was stagnant in the final three months of 2022 and the first quarter of this year.

“The big picture is that the eurozone is struggling. It has only grown by 0.1% over the past year, and the timeliest business surveys consistently point to activity declining at the start of [the fourth quarter],” Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, wrote in a note.

The economy, he added, will “remain sluggish” whether or not the eurozone suffers a technical recession, defined as two consecutive quarters of falling GDP.

Inflation continues to ease

In a more positive development, separate data showed that inflation continued to slow this month, falling below 3% for the first time in more than two years. Consumer prices in the euro area rose 2.9% in October compared with a year ago, down from a rate of 4.3% in September, Eurostat said.

“The decline is mainly due to the fact that the strong increase in energy and food prices in October 2022 was not repeated this year,” said Christoph Weil, senior economist at Germany’s Commerzbank.

Core inflation, which strips out volatile food and energy prices, eased to 4.2%, from 4.5% in September.

The let-up in inflation will be welcomed by the European Central Bank, which has been hiking interest rates for more than a year to rein in high prices. The ECB kept rates unchanged last week — ending a run of 10 consecutive rate hikes — as inflation continues to fall sharply and the economy weakens.

Eurozone set for ‘stagnation’

The euro area economy has struggled to regain momentum after it was hit by a huge increase in energy prices triggered by Russia’s full-scale invasion of Ukraine in February 2022. Germany, the region’s biggest economy, felt the full force of the impact because of its huge manufacturing sector and reliance on Russian gas at the time.

The interest rate hikes that followed, to tame soaring inflation, have further weighed on spending by consumers and businesses.

Recent survey data shows that activity in the eurozone’s manufacturing and services sectors has been on a downward trajectory, with demand for goods and services set to weaken further.

Even if the region avoids a recession, economists say a meaningful recovery is still some way off.

“Momentum going into [the fourth quarter] remains exceptionally weak, weighed down by tight financial conditions,” said Rory Fennessy, an economist with Oxford Economics. “The eurozone economy is set for a period of economic stagnation.”

Official GDP data out of Germany and France — Europe’s number one and two economies respectively — supports that view.

French GDP grew just 0.1% in the third quarter compared with the previous three months, when it beat economists’ expectations to expand by 0.6%. Output in Germany, meanwhile, shrank slightly in the third quarter.

Elsewhere, Spain’s economy continued to grow but at a slower pace than in the previous quarter, while Italy stagnated.

Ireland’s volatile GDP plunged 1.8%, contributing to the euro area’s contraction. The region may have otherwise escaped a negative GDP number.

“The economic environment is weakening at the moment, but no sharp recession is in sight either,” said Bert Colijn, senior eurozone economist at Dutch bank ING. “Still, continued economic and geopolitical uncertainty alongside the impact of higher rates… will weigh on economic activity in the coming quarters.”

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