Trade Drags Euro-Area Economy as Rebound Remains in Question

(Bloomberg) -- Falling exports and a slowdown in spending and investment caused euro-area growth to lose more of its luster in the third quarter, with recent numbers casting doubts over the economy’s potential to rebound.

Net trade was the biggest drag on the economy in the period, when growth was the weakest in almost five years. Since then, reports from the region’s largest economies have pointed to continued struggles of German car manufacturers, a pickup in French industry and subdued consumer spending in Italy.

Trade Drags Euro-Area Economy as Rebound Remains in Question

The data are some of the last the European Central Bank will receive before the Governing Council convenes for a crucial session next week.

Policy makers are planning to announce a halt of quantitative easing after three years and 2.6 trillion euros ($3 trillion) of bond purchases, arguing that the region’s slowdown is temporary and a pickup in wages suggests the underlying growth momentum remains intact.

Indicator
Current period
Prior period
Euro-area employment (3Q, q/q)0.2%0.4%
German labor costs (3Q, q/q)1.0%0.2%
German industrial production (Oct., m/m)-0.5%0.2%
French industrial production (Oct., m/m)1.2%-1.8%
Italian retail sales (Oct., m/m)0.1%-0.8%

Key Insights

  • Trade chopped off 0.2 percentage point of GDP growth, and a boost of 0.3 percentage point from changes in inventories doesn’t bode well for economic prospects. Big increases in that category usually point to weakening demand, with ready-to-sell goods ending up in warehouses rather than with customers.
  • Government consumption and investment slowed to levels that didn’t make a contribution to third-quarter growth. Private consumption added 0.1 percentage point to output as employment continued to increase.
  • Economic weakness is persisting, with purchasing managers indexes suggesting activity is at its lowest level in more than two years and Italy at risk of a recession.
  • Industry data from Germany, the region’s largest economy, have been mixed: factories saw strong demand from the euro area in October, while industrial production unexpectedly declined. The Bundesbank and the ECB will publish new growth and inflation projections through 2021 next week.

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  • Policy makers have stressed they’ll continue to provide stimulus even after bond buying stops. ECB chief economist Peter Praet has said an end of net purchases “is not tantamount to a withdrawal of monetary policy accommodation.”
  • In an effort to underpin the region’s fragile upswing, economists predict the ECB will offer new long-term loans to banks next year while going slow on interest rates, according to a Bloomberg survey of economists.

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