Thursday 13 December 2018

Eurozone growth slows as US powers to new high

Fears over ECB's ability to act on rates if fresh downturn arrives

The great divide: The 'divergence in economic performance' in the euro area has also limited options, say analysts
The great divide: The 'divergence in economic performance' in the euro area has also limited options, say analysts

David Chance

The eurozone economy expanded at its slowest pace in more than four years as the rate of growth in the third quarter halved from the pace of the first half of the year to just 0.2pc, dragged down by near-stagnation in Italy and likely a weaker performance in Germany.

According to data released yesterday, the euro area grew 1.7pc from a year earlier, far slower than expected.

It posted growth of 2.7pc for the whole of 2017, its fastest expansion in the decade since the financial crisis, which had sparked hopes Europe was set for a sustained upturn.

The weak growth numbers released highlighted the stark difference between Europe's slow recovery from the 2007 financial crisis and that of the United States, where the latest data showed the world's largest economy grew 3.5pc in the third quarter in what looks to be a record-setting expansion in terms of length.

Europe's poor performance also cast doubt over whether the European Central Bank would manage to raise interest rates at all before the next downturn. That's in contrast to the Federal Reserve, which has raised interest rates eight times in the past three years and will have more room to stimulate the economy with cuts should a downturn occur.

"The divergence in economic performance within the euro area is also increasing, limiting the ECB's options," said Shweta Singh, MD of Global Macroeconomics at advisory firm TS Lombard in London.

"The central bank will likely downgrade its growth assessment in December and adopt a more dovish end to its quantitative-easing programme than previously expected."

The euro area's overall performance was hit by growth of just 0.02pc in Italy in the quarter. Italy has gone head to head with Brussels over its budget plans and will face further scrutiny after the latest growth numbers. These look set to prompt more questions over its forecasts as it needs growth of 0.5pc each quarter versus the prior quarter to hit its budget targets.

While the ongoing Italian and Brexit dramas dominate headlines and markets, a greater risk comes from a slowdown in the pace of growth in the Chinese economy.

A key export market for the bloc - especially for Germany, Europe's largest economy - it is much more exposed to a global economic slowdown than the United States as it accounts for 15.8pc of world exports, higher than the 11.5pc of the US.

China's continued growth through the economic crisis while others fell into recession kept the world economy afloat.

It represented more than 40pc of the rise in world gross domestic product over the period.

Volkswagen, for example, sells almost one in three of the cars it makes in China.

Adding to Europe's woes, a key measure of economic sentiment among managers and consumers dropped for the 10th consecutive month in October, indicating that the slowdown may gather pace.

Irish Independent

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