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Euro-area growth misses estimates as ECB mulls more stimulus

With a slowdown in emerging markets testing the strength of the pick up in the currency union, the data will provide ECB President Mario Draghi with more visibility heading into December's monetary policy meeting.

[MADRID] Euro-area economic growth unexpectedly slowed in the third quarter, underscoring the vulnerability of the region's recovery as the European Central Bank examines the need for fresh stimulus.

Gross domestic product in the 19-nation bloc rose 0.3 per cent, data showed Friday, down from 0.4 per cent in the previous period, which was also the median estimate of economists in a Bloomberg survey. Germany and France's economies each grew 0.3 per cent, while Italy's expanded 0.2 per cent.

With a slowdown in emerging markets testing the strength of the pick up in the currency union, the data will provide ECB President Mario Draghi with more visibility heading into December's monetary policy meeting. The central banker has signaled additional stimulus is in the pipeline, citing renewed downside risks for growth and the region's inflation outlook, which risks becoming entrenched well below the ECB's goal of 2 per cent.

GDP missing estimates for the currency bloc adds "to the already strong case for the ECB to step up monetary stimulus in December," Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam, said before the euro-area data were published.

"The domestic economy has been doing well, but the euro zone faces external drags, with world trade growth weak and exports to emerging markets falling like a brick."

Speaking at the European Parliament on Nov 12, Mr Draghi said the outlook for core inflation, which removes volatile items like energy, had "somewhat weakened," while noting that downside risks from a global slowdown are "clearly visible."

"What we've seen in the data leading up to this is very low-end industrial production, and missed expectations, and weak factory orders, so any kind of suggestion that this is a result of infiltrated weakness coming from emerging markets will release expectations that Draghi will act," said Eimear Daly, a currency strategist at Standard Chartered Plc, told Bloomberg TV on Friday.

"It's quite highly priced in the market that he is going to do something at the December meeting."

There is a 96 per cent chance that the ECB's Governing Council will cut its deposit rate by 10 basis points in December, taking it to minus 0.3 per cent, ECB-dated Eonia forwards show.

The euro weakened after the data, dropping toward a six- month low against the dollar. Bonds advanced from Germany and France to Italy.

German and French GDP were in line with economist estimates, while data for Italy, the Netherlands and Portugal fell short of projections in Bloomberg surveys.

China's attempt to transition from an investment boom to consumer-led growth poses risks to export-oriented Germany, itself struggling to raise productivity in an aging society. At the same, record-low unemployment, easy credit conditions and a weakened currency have provided a buffer to consumers and companies.

The German data "does not represent the fundamental cruising speed of the German economy," said Andreas Rees, an economist at UniCredit SpA in Frankfurt.

"Anyone who thinks that the development after the summer break marks a turnaround to the worse will soon get a bloody nose. A rebound in exports and industrial activity plus strong internal demand is a pretty decent growth cocktail."

In a sign of the difficulties in global trade, Hamburger Hafen & Logistik AG, expects a "strong decrease" in container volumes this year on slowing growth in China, its top trading partner, and as Russia heads for the longest recession in two decades. The gloomy outlook by the handler of three in four containers at Germany's biggest port follows a 40 per cent decline in traffic with Russia on European Union and US sanctions. The third quarter was also blighted for euro-area companies by Greece's near-exit from the currency bloc, which dented confidence in the region's outlook.

Meanwhile in France, domestic demand contributed 0.3 per cent to growth in the quarter as consumers benefit from lower oil prices, boosting disposable income. Inventory building contributed 0.7 per cent, while external trade represented a 0.7 per cent drag on growth. Corporate investment rose 0.7 per cent after a 0.5 per cent increase the previous quarter.