Emeritus Professor Joe Nellis is Head of Economic Research at MHA, the accountancy and advisory firm.
The Eurozone is showing unexpected resilience against a backdrop of considerable economic and geopolitical uncertainty. Growth came in at 0.4% in Q3, down from 0.6% in Q2, putting the economy in a better-than-expected position as we head towards 2027.
The economic bloc’s growth is not currently being supported by its three largest economies: Germany, France, and Italy. In Q3, the German economy grew by only 0.2%, the French contracted by 0.1%, and the Italian failed to grow. It is other countries that are picking up the strain. In contrast, Spain is displaying greater resilience with growth of 0.6% in Q3 supported by stronger domestic demand.
But is this growth masking the structural challenges that the European economy has been facing for a long time? Productivity growth has been weak and investment expenditure remains subdued, while demographic pressures and declining industrial competitiveness have contributed to the region’s long-term lack of dynamism.
The outlook for 2027 is complicated by the prospect of further inflationary pressures. Unless the Middle East crisis is resolved in the very near future, energy and transportation costs will continue to rise, putting even more pressure on the cost of living and household finances at a time when consumer confidence is weak.
This puts the ECB in a tough position. Although there has been an uptick in growth in Q2 and Q3, the Eurozone has been plagued by sluggish growth for a number of years. There is therefore a strong argument for maintaining supportive monetary conditions, but with inflationary pressures continuing to mount, the ECB may be forced to raise interest rates further at its December meeting.
The Eurozone faces the prospect of entering next year confronted with a weak outlook for economic growth and the possibility of renewed inflationary pressures. In the absence of stronger investment, improvements in productivity and greater economic competitiveness, Europe faces the prospect of a year of disappointing economic performance.
