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Eurozone economy shrinks in Q3, inflation falls further

By AFP - Oct 31,2023 - Last updated at Oct 31,2023

The signs of weakness in the economy prompted the ECB to leave interest rates unchanged earlier this month (AFP file photo)

BRUSSELS — Economic growth in the eurozone contracted in the third quarter, data showed on Tuesday, hit by the European Central Bank's (ECB's) painful rate-hiking campaign and Germany's weakening economy, but inflation slowed in October.

The EU's official data agency said the 20-country single currency zone's economy shrank by 0.1 per cent over the July-September period, after recording only 0.2 per cent growth in the second quarter. 

The figures reflect the difficulties facing the eurozone including the cost-of-living crisis and concerns over the flagging demand in the global economy.

Although the eurozone has weathered the shocks from the coronavirus pandemic and the war in Ukraine, fears are growing over the economic effects of the Israel-Hamas war.

The data published by Eurostat on Tuesday showed, however, the whole 27-country European Union economy — including members who do not use the euro — fared better, growing by 0.1 per cent in the quarter.

Germany's economy shrank by 0.1 per cent in the third quarter, while Austria also recorded a contraction of 0.6 per cent.

France, the EU's second biggest economic powerhouse, only grew by 0.1 per cent, and Italy's economy stagnated in the third quarter, the data showed.

Germany has been hit hard by elevated energy costs, a sluggish manufacturing sector and high interest rates designed to tame inflation.

Consumer price inflation in the eurozone has slowed to 2.9 per cent, Eurostat data for October showed Tuesday, the lowest rate since July 2021 when it reached 2.2 per cent.

The figure is down from 4.3 per cent in September and lower than predicted by analysts who had expected inflation to remain above 3 per cent.

The inflation rate is also now closer to the ECB's 2 per cent target. Despite higher borrowing costs, the ECB remains steadfast behind its mission to tame red-hot inflation.

But signs of weakness in the economy as well as ebbing price pressures prompted the ECB to leave interest rates unchanged earlier this month after raising them in each of their previous 10 meetings.

"Continued deflation in energy prices and easing food price inflation were the main drivers," Tomas Dvorak, senior economist at Oxford Economics said, adding that he expected inflation to "dip below target" in 2024.

"We think the ECB will start with rate cuts already" as early as in April, he added.


Inflation slows 


Eurozone inflation is down from its peak of 10.6 per cent in October last year following Russia's invasion of Ukraine which sent energy prices spiralling.

Core inflation, which strips out volatile energy, food, alcohol and tobacco prices, also slowed to 4.2 per cent in October from 4.5 per cent in September, Eurostat said.

Core inflation is the key signal for the ECB.

Belgium and The Netherlands was the only countries where consumer prices fell, by 1.7 per cent and 1 per cent respectively in October, according to Eurostat figures.

Energy prices in the eurozone fell much further in October, sinking by 11.1 per cent on the back of a drop of 4.6 per cent the previous month.

The rise in food and drink prices also slowed down, reaching 7.5 per cent in October compared with 8.8 per cent in September, according to Eurostat.

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