Eurozone Real GDP Loses Steam

Over the summer, eurozone real GDP turned in its worst performance since 2020. But the third-quarter contraction is still restrained and could very well be reversed in future revisions. For now, it's more likely to be a sign of ongoing stagnation rather than the start of a recession, even though the second possibility can't be entirely ruled out. It all depends on what happens with the economy this fall and in the next few quarters. Recent changes in eurozone PMIs suggest a sharper economic slowdown may be in the offing for the fourth quarter of 2023 (graph 1).

The preliminary flash estimate doesn't include detailed information on GDP components. But it does offer more information on how growth was distributed over different countries (graph 2). Real GDP for Germany, the eurozone's biggest economy, also edged down 0.1% over the summer. Meanwhile, GDP in France (+0.1%) and Spain (+0.3%) kept growing, but much more slowly than in previous quarters. In both cases, real consumption went up, but net exports are showing some weakness. Investment in Spain also slowed down.

Given the European Central Bank's goal of slowing inflation to its 2% target, a stagnant eurozone economy could very well be seen in a good light. The region has so far escaped the worst consequences of a recession and unemployment remains exceptionally low, so slower GDP growth could help ease inflationary pressures. Inflation shrank to "only" 2.9% in October, according to the flash estimate that was also released today. That's a big improvement over last year, when inflation topped 10% (graph 3).  That said, core inflation proved to be more persistent at 4.2% in October.

The eurozone economy is losing steam, combining slow growth, stagnation and slight declines in real GDP. We can't completely rule out a recession, and economic activity may deteriorate further in the next few quarters. But economic sluggishness is still enough to help curb inflation. This allowed the European Central Bank to pause its rate hike campaign and may very well make it one of the first major central banks to consider cutting rates in 2024.