Eurozone economy surges despite surprise slump in France

THE euro-area economy surged in defiance of headwinds including elevated inflation and the selloff in bond markets, though France suffered an unexpected slump.

Gross domestic product across the 21-member currency bloc rose 0.4 per cent in the third quarter, twice the pace analysts predicted. Performances were mixed among its biggest members as Germany and Spain grew, Italy stagnated and France shrank by 0.1 per cent.

The overall outcome highlights Europe’s broader sturdiness, not just to the Iran war’s inflationary impact but to the heat waves and droughts that marred much of the summer. Still, the European Central Bank has flagged downside risks and could yet hike interest rates for a third time in December after standing pat this week. 

While inflation hasn’t spread beyond energy yet, policymakers in Frankfurt are wary. Separate data from France won’t reassure them, with consumer prices jumping 3.8 per cent in October, the highest level since late 2023. Inflation in Spain, despite easing a touch as anticipated, remained elevated at 4.9 per cent.

The jump in global bond yields is another drag, with France’s shaky fiscal and political position making it the region’s focal point. Its economy was already the euro area’s major laggard, only narrowly avoiding a recession in the first half amid soft domestic demand, falling investment and as hot weather hurt agriculture.

The outlook is bleak. Prime Minister Sebastien Lecornu is in the midst of another parliamentary showdown over austerity, against a backdrop of social and political upheaval before presidential elections in 2027 where the far right leads polls.

“France’s economy is at a standstill due to a unprecedented convergence of external and domestic shocks,” Finance Minister Roland Lescure said on Friday. “It needs to pick up. We need to restore confidence and for that having a budget is essential as that is what will allow us to bring down interest rates.”

German GDP rose 0.2 per cent despite factors including low water levels in the River Rhine. A public-spending spree on infrastructure and defence is generating optimism while carmakers may benefit from a European cap on Chinese hybrid-vehicle imports.

At the same time, Chancellor Friedrich Merz has made fresh efforts to perk up growth through social-welfare reforms and attempts to lure private capital.

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Italy’s government forecasts GDP will increase 1 per cent in 2026, helping finance some of the tax cuts Prime Minister Giorgia Meloni has promised before elections next year.

She’s also asked Brussels for extra leeway of about 28 billion euros (US$31.3 billion) for energy and defence outlays. Any slowdown in growth would complicate other fiscal commitments, including getting the budget deficit below 3 per cent of output.

Spain, whose latest GDP reading was driven by domestic demand and trade, has shown significant resilience, with the central bank listing private consumption, job creation and population growth among drivers.

It sees growth of 2.6 per cent in 2026 and 2.2 per cent in 2027, comfortably above the euro area’s pace. It has largely shaken off political instability including Prime Minister Pedro Sanchez inability to pass a budget. BLOOMBERG