Well, well, well. Would you look at that. The euro area economy has managed to pull a rabbit out of the hat, delivering a better-than-expected Q3 GDP reading at first glance. But before we start popping the champagne, there's a catch or two worth considering when you look at the details.
To start, quarterly growth did still slow down to 0.4% in the third quarter - down from 0.6% in the second quarter. So while the headline surprise is encouraging, the underlying momentum isn't quite as impressive as it might seem.
And when you drill deeper into the details, that is when things start to get a bit more interesting.
Of note, Ireland leads the pack with a whopping 5.5% quarterly expansion in Q3. Having said that, Ireland has a knack for notoriously volatile GDP figures in the past year and that always warrants some caution. The expansion here was primarily driven by strong activity in multinational-dominated industries, specifically information and communication and manufacturing.
For some context, Ireland's headline growth figure is often a distorted gauge of domestic economic health. That is because it is heavily influenced by contract manufacturing and global profits of multinational corporations that largely flow back to foreign shareholders rather than translating directly into local living standards.
Besides that, Spain continues to punch above its weight with 0.6% growth while the Netherlands also posted a respectable 0.6% increase.
Elsewhere though? The picture isn't so pretty.
Germany managed just 0.2% growth, Italy stagnated at 0.0%, and France even contracted by 0.1%. Now, that's hardly an endorsement of economic resilience across the biggest economies in the region.
So, what does this mean for the ECB?
We've seen inflation pressures heating up in France and Spain today even as the growth picture remains rather uneven. Meanwhile, German state inflation readings offered some relief but the broader concern remains that higher energy costs would eventually feed through to prices while weighing on economic activity.
And that is precisely the kind of stagflationary squeeze policymakers would want to avoid at this juncture.
So the real question now is whether the euro area can maintain its growth momentum as higher prices are going to squeeze households and businesses more and more in the months ahead. The latest report today might suggest that growth conditions are holding up a little bit better than feared, but whether that remains the case heading into Q4 will be a different story altogether.
This article was written by Justin Low at investinglive.com.
Source: Investing Live - News
