European bond yields are up, with French bonds nearing Greek and Spanish risk levels. Equities fell, the euro rose, and oil declined.

European bond yields are rising sharply (prices are dropping.) The UK-Germany 2-year yield spread has reached its widest since September 2023, at around 210 basis points. French bonds are now seen as close to riskier than those of Greece and Spain. Equity markets posted negative results, a typical reaction to strong bond yield increases. The euro appreciated, trading at 1.0834 against the dollar. In commodities, Brent crude oil prices declined by 3.34%, mainly due to easing tensions in the Middle East and concerns over weak demand leading to potential oversupply.

The Eurozone's Q3 GDP rose unexpectedly to 0.4%, driven by temporary factors, but underlying economic challenges remain, with inflation at 2% and concerns about sustainable growth ahead.

In Q3, the Eurozone's GDP unexpectedly grew by 0.4%, easing recession fears, although this was influenced by temporary factors like Ireland's volatile economic performance. Growth in France, likely boosted by the summer Olympics, and Spain's robust 0.8% growth, supported by EU investments, contributed positively. However, underlying economic challenges persist, particularly in Germany, which grew by just 0.2%, and Italy, which stagnated at 0%. Inflation rose to 2% in October, driven by rising energy and food prices, while unemployment reached a record low of 6.3%. The ECB faces complexities in balancing growth and inflation management, with projections suggesting slower growth in Q4 of 0.2% to 0.3%. Concerns about sustainable recovery continue, reflecting cautious consumer behaviour and low industrial capacity utilization.

The Eurozone’s GDP growth rose unexpectedly to 0.4% in Q3, driven by temporary factors. However, underlying economic challenges persist, warranting caution about a sustainable recovery moving forward.

The Eurozone demonstrated unexpected economic resilience in Q3, with GDP growth accelerating from 0.2% to 0.4%. This positive shift, while partially influenced by temporary factors, alleviates concerns regarding a recession that had been prevalent in recent months. However, it is important to contextualize this growth: notably, the volatile nature of Irish GDP significantly contributed to these results, and without Ireland’s performance, the Eurozone’s growth would have registered a more modest 0.3%. Additionally, the reported growth in France, at 0.4%, was likely bolstered by the summer Olympics, underscoring the impact of one-off events on economic statistics.

Despite these encouraging figures, it would be premature to view this data as the catalyst for a robust recovery in the Eurozone. The ECB has consistently highlighted concerns regarding economic downturns, and while the latest GDP figures provide a measure of reassurance, the broader economic outlook remains precarious. Germany's modest growth of 0.2% prevented a recession, while Spain continued to show strong performance with a 0.8% growth rate, supported by investments from the EU recovery fund. Conversely, Italy's stagnation at 0% growth serves as a reminder of the disparities within the region.

Looking ahead, caution is warranted regarding the sustainability of this growth trajectory. Consumer behaviour remains conservative, with increased saving rates potentially stifling a rebound in consumption despite some anticipated real wage growth. While lower interest rates may stimulate investment, the effect is likely to be constrained by low capacity utilization in the industrial sector and a challenging export environment. Therefore, while the third quarter's GDP results are indeed encouraging, they do not signal the beginning of a vibrant recovery.

We project a slowdown in growth during the Q4, as indicated by the ECB, and believe the economy will expand by approximately 0.2% to 0.3%.

Eurozone inflation rose to 2% in October, driven by energy and food prices, while unemployment hit a record low of 6.3%.

Eurozone inflation climbed to 2% in October, surpassing expectations, while core inflation remained steady at 2.7%. This increase, driven by a 2.8% rise in energy prices and a 3.5% increase in food costs, signals a significant shift from the disinflationary trend seen in September, when inflation fell to 1.9%. Services inflation held at a high annual rate of 3.9%, consistent with September's levels. The latest data suggests a potential slowdown in the region's economic recovery, adding complexity to the ECB decisions on future interest rate cuts. With consumer prices rising 0.5% MoM in October, the ECB faces growing challenges in balancing economic growth with inflation control. Meanwhile, the labour market remains strong, with unemployment reaching a historic low of 6.3% in September—the lowest since the Eurozone’s inception in 1999. This tight labour market continues to drive wage pressures, indicating that inflation risks are not yet fully contained, though forecasts project a deceleration in wage growth by 2025 as labour market conditions are expected to ease.

Despite a recent GDP growth rate of 0.3% for Q3, which suggested a rebound, there are concerns that this figure may have overstated economic momentum, influenced by one-off factors. ECB President Christine Lagarde previously pointed to a downward trend in inflation data, but recent figures contradict this narrative, signalling an upward shift. As demand-driven inflation remains subdued, with core inflation expected to align with ECB targets by 2025, the risks to the inflation outlook persist, as ongoing wage growth and labour market pressures continue to create upward inflationary risks.

We anticipate that moving forward, the sharp decline in energy prices, combined with limited decreases in other factors, will help keep inflation within a 1.9–2.3% range for an extended period. We anticipate two additional rate cuts of 25 bp each over the next two months.

The German economy grew unexpectedly in Q3, avoiding recession, but remains stagnant due to structural issues, rising insolvencies, and an ineffective traditional economic model.

In Q3, the German economy unexpectedly grew by 0.2% QoQ, successfully avoiding a technical recession. This growth follows a downward revision of the second quarter’s contraction to -0.3% QoQ, indicating a challenging economic landscape. Despite this positive data, the year-on-year contraction of 0.2% highlights that the economy remains sluggish, barely larger than pre-pandemic levels. The growth has been attributed to increased private and public consumption, yet it does little to dispel the overarching concerns regarding persistent stagnation. Indeed, the German economy continues to be a magnet for negative macro news; since the pandemic began, quarterly growth has stagnated on average.

The challenges facing Germany stem from both cyclical and structural headwinds. Although the pandemic and the war in Ukraine have exacerbated existing vulnerabilities, they are not the root causes of the current economic malaise. In a landscape where China has emerged as the "new Germany" in manufacturing, the traditional German model—characterized by cheap energy and accessible large export markets—has become ineffective. Looking ahead, the outlook remains cautious, with rising insolvencies and restructuring announcements casting shadows over the labour market, which has been a relative strength in recent years. While recent rebounds in PMIs and the Ifo index suggest the economy may sidestep a severe recession, risks loom, including potential US tariffs on European goods. Moreover, the German government has yet to establish cohesive policy measures to address the structural challenges facing the economy. GDP figures provide a welcome reprieve but do not alleviate the underlying stagnation that continues to hinder economic progress.

We maintain our view that Germany will be a significant drag on European economic growth in 2024. We anticipate that improvement will not begin until Q2 of 2025.