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Groceries in a shopping cart in the supermarket

Photo: Fabian Sommer / dpa

In the eurozone, economic output contracted surprisingly in the summer. In the third quarter, the gross domestic product (GDP) fell by 0.1 percent compared to the previous quarter, the statistics office Eurostat announced on Tuesday in Luxembourg after an initial estimate. On average, economists had expected stagnation.

In the second quarter, the economy had grown by 0.2 percent. There had been stagnation in the first quarter and fourth quarter of 2022. Compared to the previous year, the economy grew by 0.1 percent in the period from July to the end of September. Economists had expected an increase of 0.2 percent.

The data refer to the 20 countries of the euro area. Croatia joined at the turn of the year. The economic development in the large countries of the eurozone showed clear differences:

  • Thus, the economy in France is down 0.1 percent

  • and in Spain by 0.3 percent.

  • In Germany, the economy shrank by 0.1 percent.

  • The Italian economy stagnated.

At the same time, inflation in the eurozone slowed significantly in October. The annual inflation rate fell to 4.3 percent from 2.9 percent in the previous month. This is the lowest rate since July 2021. Analysts had expected a decline, but recently expected a slightly higher rate on average.

Core inflation also declined, excluding volatile energy and food prices. It fell to 4.5 percent from 4.2 percent in the previous month. According to many economists, core inflation reflects underlying inflation and therefore represents the inflation trend somewhat better than the headline rate.

Although food and beverages were still significantly more expensive than a year ago, the upward trend in prices slowed from 8.8 to 7.5 percent. Energy prices fell by 11.1 percent compared to the same month last year. The prices of industrial goods and services rose more weakly than in the previous month.

Consumer prices rose by 0.1 percent in October. An increase of 0.3 percent had been expected.

ECB's inflation target exceeded

Despite the markedly weaker inflation, the European Central Bank's (ECB) medium-term inflation target of two percent is still being exceeded. Last year, inflation was in double digits at times as a result of the Ukraine war. The ECB had therefore raised its key interest rates significantly.

"We assume that the ECB will not raise key interest rates any further," writes Commerzbank economist Christoph Weil. "This is all the more true as economic growth in the euro area has come to a standstill." However, Weil does not expect inflation to fall further for the time being.

In the countries of the euro area, inflation trends varied widely. Slovakia had the highest annual rate at 7.8 percent. In Belgium (-1.7 percent) and the Netherlands (-1.0 percent), prices even fell year-on-year. Of the three major eurozone countries, France had the highest inflation rate at 4.5 percent. In Germany, it was 3.0 percent. In Italy, the inflation rate fell to 1.9 percent, again below the ECB's inflation target of <> percent.

VP Bank Chief Economist Thomas Gitzel expects the economy to continue to shrink in the fourth quarter. However, the inflation trend gives him hope. "The falling inflation rate in particular is also the key to higher growth in the future," Gitzel writes. "A normalizing inflation trend is a necessary condition for a change in economic trend."