Eurozone economy maintains its strong pace, with inflation falling - ING

An impressive report card for the Eurozone economy as GDP growth comes in at 0.6% QoQ and the unemployment rate drops to 8.9% while the drop in core inflation to 0.9% will no doubt be taken as a justification for dovish tapering by the ECB, explains Bert Colijn, Senior Economist at ING.

Key Quotes

“Strong growth, falling inflation and falling unemployment, what’s not to like? GDP growth came in strong again in Q3 at 0.6% QoQ. This was slightly slower than the upwardly revised Q2. These revisions have contributed to a further improvement in the annual growth rate for 2017, which we now expect to come in at 2.3%. The current pace of economic growth is well above trend and is causing the output gap to be closed quicker than expected. While the expenditure breakdown has not yet been released, domestic demand has most likely been an important contributor to growth again, given labour market strength and improving investment conditions such as higher capacity utilization and improved lending demand and conditions. In France, for which the breakdowns has already been released, consumption growth increased and investment growth remained robust at 0.8% QoQ.”

“The tick down in headline inflation was widely expected as energy base effects are pushing the inflation rate down for the moment. The drop in core inflation is more notable. The decline in core inflation may have been the most surprising data point today. It was well below analyst estimates and the lowest reading in five months. While seasonal effects are likely impacting the number to a certain degree, price growth in services dropped from 1.5% to 1.2% and these prices are likely to bounce back - this will be taken as a sign that last week’s dovish tapering from the ECB were justified. Even though pipeline inflation pressures are slowly mounting, the 2% target is getting further away for now.”

“Some positive news for inflation growth in the medium term is that unemployment feel significantly, to 8.9% in September. July and August were also revised downwards from 9.1 to 9%, causing the summer stagnation in unemployment to disappear. That stagnation would have been somewhat odd given the strength in economic performance and business survey data on hiring anyway. This means that the labour market recovery continues to underpin the economic recovery at the moment, which will boost GDP growth over the winter months. The most important question remains when the labour market recovery will start to impact price growth. For now, do not hold your breath.”