Eurozone grows by more than expected, but it’s not out of the woods yet

14th November 2014

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Germany has managed to avoid recession and the eurozone economy grew by more than expected but the area is still struggling to break out of a ‘sluggish growth environment’.

Latest figures show the eurozone economy grew by 0.2% in the third quarter compared to the previous quarter, which was better than consensus expectation of 0.1% and compared to the year before, the eurozone grew 0.8%.

Azad Zangana, Schroders European economist, said that the performance of individual member states remains ‘very diverse’ and reflects fiscal and structural reforms.

Italy is in recession after the economy shrunk by 0.1% compared to Spain where it grew 0.5% but all eyes were on eurozone giant Germany.

‘Having contracted in the second quarter, Germany was feared to have slipped into recession given falls in industrial production and retail sales during the third quarter,’ said Zangana. ‘However, the economy managed to eke out 0.1% growth to avoid a technical recession. Consumer spending appears to have saved Germany as business investment continues to flounder, possibly in reaction to rising tensions between Europe and Russia.

‘Meanwhile, France beat expectations by recording 0.3% growth, although according to the French statistical office, much of that growth is driven by government spending.’

In good news, beleaguered Greece was the fastest growing economy in the eurozone with 0.7% growth in Q3.

‘It appears the Greek economy has finally stabilised and while there is still a mountain of fiscal and structural reforms that need to be implemented, positive growth will help ease the social problems caused by the crisis,’ said Zangana.

However, Zangana warned that while the latest GDP figures are better than expected ‘they continue to paint a picture of a weak eurozone economy that is struggling to break out of this sluggish growth environment’.

He added: ‘Consequently, inflation remains dangerously low – confirmed at 0.4% year-on-year for October – which will trouble the European Central Bank (ECB).’

Andy Scott, association director at foreign exchange provider HiFX agreed that the bigger picture should not be ignored in light of positive figures, particularly the impact of inflation.

‘It’s important to consider the bigger picture and when you do, it’s clear that the future appears to be rather gloomy still,’ he said. ‘Unemployment remains incredibly high for a group of mostly developed economies at 11.5% and though it dropped at the end of last year and the start of this year, it hasn’t fallen since May.

‘It’s difficult to boost economic activity if you have large numbers of the population dependent on government support, and evidence of the lack of domestic demand can be seen in another problem area – inflation.’

He added that the ECB was far short of its 2% inflation target and ‘while some of the drops in price pressures can be attributed to lower energy prices, a lot is to do with companies in Europe cutting prices to try and boost – or maintain – demand’.

He added: ‘Recovery is not a word that can be associated with most of the eurozone economies, and until it is, the future doesn’t look so bright.’

 

 

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