Euro Area Economic Outlook
GDP dipped 0.1% quarter on quarter in Q3 on the back of worsening external demand and higher interest rates, swinging from Q2’s 0.2% expansion. Germany’s slight contraction amid on an ailing industrial sector weighed on the reading. The economy is set to stagnate in the current quarter, restrained by higher interest rates and waning savings. In October, the manufacturing PMI signaled a sharper decline, while the services sector was mired in contractionary territory for the third consecutive month. Additionally, economic sentiment soured in the same month, with consumer sentiment hitting a seven-month low. More positively, inflation dropped more than expected in October, which should give some breathing room to households. In politics, in November, the Spanish parliament backed a left-leaning government, while the socialist government fell in Portugal on a corruption scandal.
Euro Area Inflation
Harmonized inflation fell to 2.9% in October (September: 4.3%). Energy prices fell more sharply, while prices for services, non-energy industrial goods, and food, alcohol and tobacco rose more softly. Inflation should fall in 2024 versus 2023’s average on still-high interest rates and a higher base effect. A wage-price spiral and commodity price spikes are upside risks.