Economic Watch: Eurozone’s slight rebound in Q3 complicates rate cuts outlooks

BRUSSELS, Nov. 1 (Xinhua) — The Eurozone economy in the third quarter (Q3) and the October inflation came out higher than expected, sending mixed signals on further rate cuts.
While the surprisingly better data offers some reassurance to the central banks, analysts believe the boost will be short-lived. Underlying sluggish growth continues to cast a cautious outlook for the months ahead, raising the likelihood of a 50-basis-point rate cut.

GROWTH REBOUND
Eurozone’s growth has shown a slightly positive sign, with Q3 seasonally adjusted GDP at 0.4 percent, up from 0.2 percent in the previous quarter.
The GDP in the EU grew by 0.3 percent in Q3, maintaining the same pace as in the second quarter, according to data from the EU’s statistical office.
Year-on-year, seasonally adjusted GDP grew by 0.9 percent in both the euro area and the EU from July to September, up from a 0.6 percent increase in the euro area and 0.8 percent in the EU in the second quarter.
Germany, the eurozone’s largest economy, reversed its second-quarter contraction to achieve 0.2 percent growth in Q3.
Bert Colijn, senior economist at ING, noted that the Q3 GDP growth in the eurozone was partly fueled by one-off factors. For instance, the 0.4-percent growth rate of France is likely boosted by activity related to the summer Olympics.
Colijn noted that this growth was heavily influenced by the accounting activities of multinationals. With a 2 percent increase, Ireland had the highest growth rate in the eurozone. Excluding Ireland, eurozone GDP growth would have been just 0.3 percent in Q3.
Colijn expressed caution regarding the eurozone’s economic outlook, forecasting weaker GDP growth in the fourth quarter. In a research report, he noted that “the eurozone economy remains sluggish for the moment.”

INFLATION UPTICK
Eurozone inflation rose slightly higher than anticipated in October, primarily driven by higher energy and food prices.
The services sector recorded the highest annual inflation rate at 3.9 percent in October, maintaining its level from September, data shows.
Food, alcohol, and tobacco saw an annual inflation rate of 2.9 percent, up from 2.4 percent in September. Energy prices, though still in decline, recorded a slower contraction in October, down 4.6 percent compared to a 6.1 percent decrease in the previous month.
Inflation for non-energy industrial goods showed a slight increase, from 0.4 percent in September to 0.5 percent in October.
Colijn attributed the increase in inflation in the eurozone to a strong job market. A separate report from Eurostat, also released Thursday, noted that euro area unemployment was 6.3 percent in September, “a historic low since the eurozone was established in 1999,” according to Colijn.

MIXED SIGNALS
Inflation in the euro area fell unexpectedly in September, leading the European Central Bank (ECB) to lower key interest rates by 25 basis points on Oct. 17. This marked the third rate cut this year and the first back-to-back rate reduction in 13 years.
Some rate-setters of the ECB have been discussing the idea of a bold 50-basis point rate cut in December to prevent a further deterioration in the economic outlook in the eurozone.
But this week’s encouraging signals, including the higher October inflation and stronger Q3 GDP growth figures, have complicated the ECB’s decisions regarding potential rate cuts.
“The direction of incoming data in the region is not quite clear, which provides the ECB with confusing signals for the path of rate cuts,” Colijn said.
Andrew Kenningham, the chief Europe economist at Capital Economics, believes that a 50-basis point rate cut remains a possibility, as the eurozone inflation is still below the ECB’s projections for Q4. ■