In the eurozone, economic growth was recorded in the third quarter of the current year, the pace of which exceeded preliminary expectations for the dynamic of the corresponding indicator.
The intensity of economic movement in the mentioned currency bloc, which includes 20 countries, accelerated along an upward trajectory in July-September 2024 to 0.4%. This information was published by the European Union’s statistics agency on Wednesday, October 30th. It is worth noting that analysts interviewed by the media predicted that the mentioned indicator would remain stable and hold steady at 0.2%. At the same time, the economic reality turned out to be more positive than the preliminary expectations regarding its condition.
In France, economic growth accelerated in the third quarter of 2024. In Spain, the corresponding dynamic is stayed strong.
At the same time, Germany’s gross domestic product (GDP) grew by 0.2% in the third quarter of 2024. The prevailing opinion among analysts was that the corresponding indicator would show a sharp decline. However, the German economic system, which is one of the largest in the eurozone, turned out to be much stronger than the assumptions about its condition.
Germany managed to avoid the materialization of a recession scenario in the third quarter of the current year. At the same time, the economy of this country was not far from the edge beyond which the implementation of the mentioned state of affairs began. Many analysts have argued that the recession is what can be called a reality that Berlin is guaranteed not to be able to avoid. Germany’s Federal Statistical Office (Destatis) stated that the upward dynamic of GDP in the third quarter of the current year is due to an increase in government spending and a growth in household spending. It is worth noting that in the preceding quarter, this indicator fell by 0.3%. Destatis revised down GDP figures for the second quarter from -0.1% previously.
Last year, the German economic system was on a downward trajectory for the first time since the beginning of the coronavirus pandemic. It is worth noting that the country’s GDP growth in the third quarter of 2024 does not mean the end of a period of difficulties and is not a signal that Berlin has managed to handle the crisis, which is deep and does not contain signs of a possible easy overcoming being formed in the context of the nowadays realities dire straits. The German economic system has not yet become a space for the materialization of a bright future, which the country aspires against the background of a gloomy present. At the same time, Berlin’s immediate prospects cannot be described as favorable or containing arguments in favor of expectations of at least a moderate improvement in the situation. The International Monetary Fund predicts that the German economic system will show zero growth this year. The corresponding indicator will be the weakest among major economies if the mentioned forecast is implemented.
The sharp drop in profit at Volkswagen, Germany’s largest company, has reinforced gloomy expectations about the country’s economic prospects. It is worth noting that the example of this manufacturer is indicative as one of the examples of the manifestation of the crisis, which has become an unambiguous and not yet overcome reality for Berlin. Volkswagen may close factories in its home country for the first time in its 87-year history. The company is also considering the possibility of cutting thousands of jobs.
Volkswagen said its operating profit for the nine months to the end of September was fixed at 12.9 billion euros ($14 billion). This indicator fell by 21% year-on-year. The company stated that the corresponding result is related to poor performance at its flagship brand and restructuring costs. Sales of Volkswagen vehicles fell by 4%. In this case, the weak consumer demand in the Chinese market was the factor of the most sensitive impact.
Volkswagen chief financial officer Arno Antlitz said on a call with analysts and reporters that the mentioned results demonstrate the urgent need to take action in an unstable environment characterized by intense competition. He also warned about painful decisions.
Arno Antlitz stated that Volkswagen has not forgotten how to build great cars. He also separately noted that costs in the automaker’s German operations are far from being competitive. According to him, things cannot continue as they are now. He said the company will resume talks with labor unions and employee representatives and discussed the possible closure of factories in Germany.
The weak earnings of Volkswagen, as noted by the media, are evidence of the deteriorating situation in the German private sector. The survey, which was published last week by S&P Global and Hamburg Commercial bank, contains information that in October manufacturing and services businesses recorded the sharpest drop in employment in almost four and a half years.
Business and consumer confidence in Germany is currently at a low ebb. Marcel Fratzcher, president of the German Institute for Economic Research in Berlin, said that the greatest concern is related to pessimism in the country. According to the expert, mental depression and incredible pessimism may be the strongest impediment in the short run.
Volkswagen encapsulates the negativity that is gripping Germany. The problems of this company will have consequences for the entire automotive industry of the country. It is worth noting that this industry is the largest sector of the German economic system, accounting for 5% of the local GDP. Also, almost 800,000 people work in the automobile manufacturing industry. It is worth noting that about 37% of them are Volkswagen employees, many in well-paid jobs.
At the same time, the mentioned company, whose ownership structure includes Audi and Porsche, epitomizes the manufacturing prowess and export success that have turned Germany’s economic system into one of the largest in the world. The growth factors that have provided the platform for the country’s financial prosperity are now under very significant threat.
A spokesperson for Germany’s auto association VDA said in a media commentary last month that there is not just a crisis in the auto industry, but a crisis in the country as a location for doing business.
Like Volkswagen, Germany nowadays faces circumstances such as high labor costs, weak productivity, and increased competition from China. In this context, it is worth noting that Berlin can no longer rely on demand from the Asian country. China is now expanding its manufacturing sector while reducing its imports from Europe. Much of this state of affairs is due to rising geopolitical tensions. For example, the United States has restricted the supply of advanced chips and equipment for the production of microcircuits of the relevant category to China. Some of Washington’s allies have joined the corresponding measures. Against this background, Beijing is beginning to intensify its efforts to develop the homegrown manufacturing sector, as the need for technology sovereignty has multiplied in the face of the current configuration of geopolitical reality. It is worth noting that in the long term, China’s producing autonomy is very likely to become a factor of impact, including economic consequences, not only for Germany but also for many other eurozone countries. The scale of the relevant consequences could be significant.
Carsten Brzeski, global head of macroeconomics at Dutch bank ING, said that China has become a competitor to Germany.
A study commissioned by the Federation of German Industries (BDI), an umbrella organization for business lobby groups, warned that a fifth of the country’s industrial output is at risk between now and 2030. It was noted that the reasons for this situation are high energy prices and shrinking markets for German goods. Moreover, to a greater or lesser extent, these circumstances are relevant for the entire eurozone.
The report, co-authored by the German Economic Institute (IW) and Boston Consulting Group, noted that the lead that the country has built up over decades in areas such as combustion technology is losing importance. It was also separately underlined that Berlin’s export model is increasingly under pressure due to factors such as growing tensions in the geopolitical space, localization weaknesses, and global protectionism. Moreover, the specified report mentioned traditional cost disadvantages relevant to Germany. In this case, it means high taxes and elevated labor and energy costs. The authors of the report also mentioned the threat that an aging population poses to the traditionally strong supply of skilled workers. According to them, the German economic system is currently in need of the biggest transformation since the post-war period. They said that additional investment is needed in everything, including infrastructure, innovation, green technologies, and education. According to them, the volume of relevant financial injections should amount to about $1.4 trillion by 2030.
At the same time, economic reformation currently does not seem realistic in terms of implementation prospects in Germany. In this context, it is worth mentioning that the country has tight constraints on government borrowing, which some experts also sometimes call a debt brake. The corresponding norms are stipulated by the German constitution.
A fractious three-way governing coalition has obstructed policymaking for months. Against this background, the German government did not have a clear vision of the country’s development strategy.
Carsten Brzeski said that lower inflation could become a factor in the growth of consumption next year, but brighter economic prospects for Berlin may come only in 2026, when a new government will be formed by the results of the general elections scheduled for September 2025. According to the expert, Germany is facing another year of a more or less stagnating economy.
As for other aspects of the economic situation in the eurozone, Italy should be mentioned in this context, where output was unexpectedly flat. The corresponding result is related to the negative contribution of net trade.
Concerning inflation, separate data from Spain showed that consumer price growth accelerated to 1.8%, but remained within the European Central Bank’s 2% target.
Inflation in Germany in October was recorded at 2.4%. It should be noted that analysts polled by the media, predicted that the harmonized inflation in the mentioned country for the specified period will be 2.1%. In September in Germany, the corresponding indicator was recorded at 1.8%. In August, this figure amounted to 2%.
Core inflation in Germany in October was recorded at 2.9%. It should be noted that the corresponding figure does not take into account the more volatile food and energy costs. In September, core inflation in Germany amounted to 2.7%. Inflation in the local services sector in October was recorded at 4%. Last month the corresponding figure amounted to 3.8%.
Deutsche Bank economist Sebastian Becker in a note said that the resumption of core inflation rise is evidence that the problem of increasing prices is not solved and that it is necessary to show more patience. According to the expert, in the short term, signs point to a growth in inflation. Sebastian Becker also said that the impact of base effects alone would cause this. According to the expert, the current weakening of the labor market suggests that the core figure will slowly decline over the next year.
The German federal labor office on Wednesday reported a larger-than-expected increase in the number of unemployed in October in seasonally adjusted terms. The number of unemployed in the country in the current month rose by 27,000, amounting to 2.86 million people. At the same time, analysts polled by the media predicted that this figure would increase by 15,000. The seasonally adjusted job rate remained at 6.1%.
According to media reports, the data published on Wednesday could potentially become a factor in easing concerns about the prospects of the European economy. Relevant concerns intensified last week when financial officials gathered in Washington for the International Monetary Fund’s meetings. At that time, several ECB officials said that the deteriorating outlook may require a larger cut in interest rates. Others urged caution.
The unexpectedly strong growth performance of the euro area economy is likely to be gradually transformed at the rhetorical level into arguments in favor of the ECB’s monetary policy strategy of gradually lowering borrowing costs. Also, in this case, the cutting of interest rates by 25 basis points is implied. Traders pared bets regarding the lowering of borrowing costs by the ECB. Currently, they estimate the probability of cutting interest rates by 50 basis points in December at about 25%. It is worth noting that their previous expectations envisioned the mentioned probability at 50%, according to swap pricing.
Economist David Powell said that the strong growth rates in the economic system of the euro area should temper expectations that in December in this region the cost of borrowing will be lowered by 50 basis points. At the same time, the expert assumes that the growth will slow down in the fourth quarter of 2024. David Powell also stated that the downside risks to the outlook are intensifying. Separately, the expert noted that the disinflation process is well-advanced. Moreover, David Powell stated that the Governing Council remains firmly committed to lowering the cost of borrowing by another 25 basis points by the end of the current year.
In the context of assessing the prospects of the eurozone economy, the greatest concerns are related to Germany. The local manufacturing sector is on a trajectory of successive weakening of competitiveness. In the long term, this could generate critical consequences that are not limited to Germany, but concern the entire eurozone. The negative scenario, which is already being realized in practice, is not insurmountable, but at the same time, the realism of its continuation is very high.
A kind of behavioral tendency is currently being observed in the eurozone in general, and in Germany in particular, whereby consumers are choosing to ramp up savings instead of spending the pay rises they have received in recent months. The reason for this concept of action is uncertainty. Separately, it is worth noting that uncertainty is not a European regional specificity, but corresponds to what can be characterized as a global circumstance of widespread impact. Moderate spending and focusing only on the most important purchases is a natural reaction to the lack of a clear understanding of what the subsequent economic dynamic will be.
It is worth noting that recently the best situation has been observed in those countries where the service sector is more important. In this case, it means the economic state of affairs, the configuration of which is generated to a greater extent by the performance of the mentioned sector. In October, private-sector output even increased at a faster pace outside of France and Germany. This is evidenced by the results of business surveys conducted by S&P Global.
The Olympics temporarily allowed France to paper over underlying weakness, which has been a factor in the negative impact on the country’s finances. At the same time, the local economic system, despite the problems and difficulties, is still showing improvement. This is very good news for the French government. Paris, as a political center, is currently facing a budget deficit, which is a factor of falling investor confidence. The financial injections into this country are on a downward trajectory. With borrowing costs rising relative to European peers, French Prime Minister Michel Barnier is trying to push unpopular spending cuts and tax increases through parliament, where he does not have a majority. Strong economic growth is also an unambiguously positive process for French President Emmanuel Macron.
At the same time, France recorded a slowdown in consumer spending in September. This is the result of the fall in consumer confidence. Unemployment in France provokes more and more anxiety. Also, local households in the context of pessimistic perception assess the further dynamic of living standards.
In Spain, the main sources of economic growth were household consumption and public spending.
Austrian economy in October showed the maximum increase for two years, which amounted to 0.3%. In this case, the impact factor was a rebound in consumption. GDP growth in Lithuania and Portugal accelerated.
Economist Martin Ademmer said that the unexpected uptick in GDP does not cancel the fact that the German economy is still trying to regain footing, and 2024 will be another year of missed growth. At the same time, the expert noted that a slight improvement in business sentiment gives some additional hope that the crisis may be in the past and GDP will continue to grow in the coming quarters.
Franziska Palmas, senior European economist at Capital Economics, said that stronger-than-expected economic growth would not deter the ECB from cutting interest rates in December. According to the expert, the mentioned financial regulator will lower the cost of borrowing by 50 basis points. This is an unpopular point of view among analysts.
Franziska Palmas predicts that GDP growth in the euro area in the fourth quarter of 2024 will slow down. According to the expert, the corresponding dynamic will be largely because the German manufacturing industry is still showing poor performance, and Italy is struggling with the end of tax incentives in the construction industry. Franziska Palmas also expects that inflation will undershoot the ECB’s forecasts for the three months.
Kamil Kovar, senior economist at Moody’s Analytics, said that the latest data on the dynamic of GDP in the eurozone would be followed by a sharp rise in headline inflation which would shut down any talk about a jumbo-sized cut.
Also, Kamil Kovar stated that published on Wednesday report puts to rest any questions of whether the eurozone is currently in recession and noted that it is not. The expert also underlined that such worries were always overblown.
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