European bond yields fell. U.S.-German spreads widened. UK-German gaps hit 20-year highs. The euro reached its lowest since October 2023. Brent crude dropped 3.86%.

European bond yields fell over the week, with the yield spread between 10-year U.S. Treasuries and German Bunds widening further to exceed 208 basis points. The gap between UK and German 10-year bonds reached a 20-year high. Equity markets saw mixed results, with Southern Europe, led by Italy, gaining, while most other markets declined. The euro weakened to 1.0541 against the dollar, hitting its lowest level since October 2023 due to macroeconomic divergence. With U.S. political tensions threatening a new trade war, economic disparities are expected to widen. In commodities, Brent crude oil prices dropped 3.86%, driven by expectations of a global supply surplus exceeding one million barrels per day in the coming year.

Eurozone GDP grew in Q3 2024, with strong employment gains, but industrial production fell 2%. Germany’s weakness may slow growth in Q4 2024.

Eurozone GDP grew by 0.4%, with the EU expanding by 0.3%, exceeding expectations. Employment increased by 0.2%, doubling forecasts, with the unemployment rate stable at 6.3%. However, concerns about slow growth persist due to high interest rates, sluggish consumption, and weak industrial output. Industrial production fell 2% in September, driven by declines in Ireland and Germany, with energy-intensive sectors like chemicals seeing broader declines. Germany’s ongoing weakness may slow Eurozone growth in Q4 and Q1 2025. Inflation in Germany rose by 2.0% in October, primarily due to higher food and service costs, while energy prices fell. Core inflation remained at 2.9%, with service prices seeing notable increases. Modest inflation rebounds are expected; though significant price surges are unlikely given Germany's weak economic conditions.

Euro area GDP and employment grew in Q3 2024, defying expectations, with firms retaining workers despite economic challenges and tight labour markets.

In Q3 of 2024, seasonally adjusted GDP in the euro area rose by 0.4%, with the EU expanding by 0.3%, in line with Eurostat’s earlier flash estimate and exceeding economist expectations. On a year-over-year basis, GDP increased by 0.9% in the euro area and 1.0% in the EU. Concurrently, Eurozone employment saw a stronger-than-expected gain of 0.2% for the quarter, doubling the forecasted growth, and pushing the annual employment growth rate to 1.0%. This positive trend in employment alleviates concerns of a labour market downturn, which could otherwise contribute to recessionary pressures, despite challenges such as high interest rates, sluggish private consumption, and weak industrial output. The bloc's unemployment rate remained at a low 6.3% in September, and firms continue to prioritize retaining workers amid concerns over future hiring difficulties, reflecting a persistently tight labour market even in the face of modest economic growth.

Looking ahead, caution is warranted regarding the sustainability of this growth trajectory. Consumer behaviour remains conservative, with higher saving rates potentially dampening a rebound in consumption despite anticipated real wage growth. While lower interest rates may support investment, their impact is likely to be constrained by low capacity utilization in the industrial sector and a challenging export environment. Consequently, despite the encouraging GDP results for the third quarter, they do not signal the beginning of a robust recovery, and growth may remain tepid in the near term.

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%.

Euro area industrial production fell 2% in September, driven by sharp drops in Ireland and Germany, with broader declines in energy-intensive sectors but stability elsewhere.

The euro area and EU industrial production report for September reveal a 2% MoM decline, following MoM gains of 1.5% and 1.2% in August. This decrease primarily reflects notable fluctuations in Ireland (-7%) and Germany (-4.5%), where production saw sharp rises and subsequent reversals, particularly in the automotive sector. Excluding Ireland, euro area production rose 0.1% from July, and excluding Germany, it declined only 0.1%, indicating relative stability across other EU countries since May. Germany’s car production, despite reversing its August spike, remains above July levels. However, a concerning trend has emerged with broad-based declines across sectors, especially in energy-intensive industries like chemicals, which had been recovering but are now backsliding. Regionally, Ireland, Denmark, and the Netherlands experienced the steepest monthly declines, while Croatia, Portugal, and Slovenia saw the highest gains, reflecting a nuanced industrial landscape with pockets of resilience amid sector-specific challenges.

The industrial sector in the Eurozone appears to be stabilizing, with the notable exception of Germany, which continues to exhibit weakness. We anticipate that Germany will be a significant drag on European growth in both Q4 2024 and Q1 2025.

Germany's inflation rose 2.0% in October 2024, driven by higher food and service costs, while energy prices fell 5.5%. Core inflation was 2.9%, with some sectors, like furniture, seeing price declines.

Germany's inflation rate, as measured by the CPI, increased by 2.0% in October 2024 compared to the same month the previous year, marking a rebound after a dip to 1.6% in September and 1.9% in August. This rise was primarily driven by higher food prices (+2.3%) and sustained above-average increases in services (+4.0%). In contrast, the impact of energy prices was somewhat muted, with energy costs falling by 5.5% YoY, including declines in motor fuels and household energy, although district heating prices saw a significant increase. Excluding food and energy, core inflation stood at 2.9%, highlighting persistent inflationary pressures across other product categories. Service prices experienced a notable 4.0% increase, driven by rising costs in insurance, social services, catering, and housing. Meanwhile, goods prices rose by 0.4%, with food prices climbing 2.3%, alongside notable increases in non-alcoholic beverages and tobacco. However, certain sectors, such as furniture and lighting, saw price declines.

We anticipate modest rebounds in inflation over the coming months, driven by rising costs in services, housing, energy and labour (due to wage increases in certain sectors). However, we do not expect significant spikes, particularly in Germany, where the economy remains relatively weak and may limit the extent of price growth.