Casting doubt on the ECB's hopes to end QE this year, and certainly hike rates some time in 2019, the euro-area economy unexpectedly grew at the slowest pace in more than four years while a reading of consumer confidence hinted at a more protracted slowdown. Euro area GDP increased only 0.2% in Q3, half the pace of the previous three months and half the 0.4% consensus forecast; it was the slowest growth rate since Q2 2014.
Commenting on the latest Eurozone disappointment, Bloomberg economists Jamie Murray and David Powell said that "growth of at least 0.3% a quarter is needed to keep the labor market ticking along and for wage pressure to keep firming. A lasting dip below that rate would call for a delay to the ECB’s tightening cycle."
Worse, growth in two of the bloc’s four largest economies - Germany and Italy - both missed, and ground to a halt, while confidence among consumers and businesses in the region fell in October to the lowest in 17 months.
It was unclear how this sharp economic slowdown will impact the decisions of the ECB whose president Mario Draghi last week acknowledged last week that the euro area lost some momentum but insisted it isn’t headed for a downturn.
As Bloomberg notes, after a stellar 2017, this year’s far weaker performance is largely a consequence of slower exports, which have suffered from protectionist policies, even as domestic demand has held up relatively well for now.
To be sure, temporary factors likely had an impact in the poor Q3 data: German output was damped by carmakers’ failure to adapt to new emissions tests which hit auto sales last month, while the recent slowdown in construction - the result of unaffordably high costs - has been brushed off by the Bundesbank which said the growth break “shouldn’t be long-lasting.”
Separately, Italy’s economy also stalled in the third quarter on weakness in the industrial sector, prompting Banque Pictet to warn there’s "material risk" of a triple-dip recession. GDP was flat 3Q 18, below consensus expectations of 0.2% growth, and the slowest since 4Q 2014. As a result of the latest miss, Rome’s growth assumptions incorporated in its controversial budget proposal, which sees GDP of 1.5% in 2019, are now even more unattainable, raising risks of fiscal slippages and a continued standoff with the European Commission.
Meanwhile, euro area industrial confidence tumbled the most since March as companies’ assessment order books deteriorated. Sentiment in services was damped, among other things, by expectations for demand, according to Bloomberg.
There is still hope that the ECB's tightening plans won't be derailed: it will be revealed on Wednesday when reports will show the latest unemployment rate and an - reportedly - an uptick in inflation. If core prices continue to rise, it would confirm the ECB’s claim that the bloc is strong enough to withstand a gradual withdrawal of monetary support, even though it would also raise risks of stagflation.
For now, however, the Euro is not that confidence, and has dropped to session lows, sliding all the way to 1.1350 after trading above 1.16 just two weeks ago.