The eurozone economy returned to modest growth in the third quarter, expanding 0.2 per cent as resilient consumer spending and easing inflation helped offset the drag from weak manufacturing and tight monetary policy. The figures mark a tentative stabilisation for the 20-nation bloc after months of stagnation and recession fears, though the pace of recovery remains fragile.
Signs of Life in a Fragile Recovery
The rebound, though modest, is a sign that the euro area may finally be emerging from the long shadow of post-pandemic disruptions, energy shocks, and higher borrowing costs. Economists had expected growth to remain flat after the economy effectively stalled over the past year.
A slightly stronger performance in Germany and France, combined with continued momentum in Spain and Portugal, contributed to the small uptick in output. Household consumption rose marginally, supported by easing price pressures and early signs of wage growth catching up with inflation. Meanwhile, services — particularly tourism, travel, and leisure — remained the main source of expansion across southern Europe.
Still, the broader picture remains subdued. Industrial production remains weak, and construction activity has slowed sharply amid elevated financing costs. Businesses remain cautious, with confidence indicators suggesting that firms are reluctant to commit to major investments until there is greater clarity on the European Central Bank’s next move.
The Policy Balancing Act
For policymakers in Frankfurt, the latest data offer a sliver of encouragement that the eurozone economy has not tipped into outright contraction. But they also underline the delicate balance the European Central Bank (ECB) faces as it weighs how long to keep interest rates at record highs.
Headline inflation across the bloc has eased sharply from its double-digit peak, but core inflation — which strips out volatile energy and food prices — remains above target. ECB officials have signalled they are prepared to hold rates at current levels “for as long as necessary” to ensure inflation returns sustainably to the 2 per cent goal.
Markets are betting that rate cuts could begin as early as the spring, but the central bank has so far resisted confirming that view. “We are in a phase of vigilance,” one senior ECB policymaker noted recently, reflecting the tension between lingering inflationary risks and mounting evidence of economic fatigue.
Diverging Fortunes Within the Bloc
Beneath the headline number, the eurozone’s growth story remains uneven. Germany — still wrestling with weak exports, subdued industrial output, and a troubled manufacturing base — posted slight growth after contracting earlier this year. France managed a marginal improvement, helped by resilient consumer demand and a strong tourism season.
Southern Europe continues to outperform its northern neighbours. Spain’s economy expanded at roughly three times the eurozone average, buoyed by domestic consumption and a robust services sector. Italy, meanwhile, saw a mild rebound after a summer slowdown, though rising borrowing costs and fiscal constraints continue to weigh on business sentiment.
In contrast, smaller economies in central and eastern Europe are showing signs of strain, as high energy prices and falling demand from Germany hit manufacturing supply chains.
Consumers and Credit
Household spending — a key driver of the region’s modest growth — has been supported by improving real incomes as inflation cools and wage settlements strengthen. Yet many consumers remain cautious. Savings rates remain above pre-pandemic levels, and surveys show that households are still prioritising debt repayment and essential purchases over discretionary spending.
Tighter credit conditions have also played a role. Lending to businesses and households continues to decline, reflecting both the impact of higher interest rates and stricter lending standards among banks. Mortgage activity in particular has fallen sharply, dampening construction and housing investment.
Outlook: Stability, but Little Momentum
Looking ahead, the eurozone economy is expected to grow only slowly into 2026, with few signs of a rapid rebound. Economists see the region entering a period of “low but steady” growth, as the drag from monetary tightening gradually fades and fiscal policy becomes less restrictive.
The risk of renewed energy volatility or geopolitical disruption remains a concern, particularly as global trade weakens and industrial production continues to lag. Still, lower inflation and a stabilising labour market could help underpin a gradual recovery in real incomes and spending power.
For now, the 0.2 per cent expansion offers a measure of relief to policymakers and investors alike — a reminder that Europe’s economy, while subdued, remains more resilient than many feared. The challenge will be to sustain that momentum in the face of lingering uncertainty, a slowing global backdrop, and the difficult task of rekindling confidence across a still-divided currency bloc.
