Slower-than-expected euro zone growth likely to seal more ECB stimulus

A worker checks a metal furnace before welding it in a factory in Gravellona Lomellina
A worker checks a metal furnace before welding it in a factory in Gravellona Lomellina, 45km (27 miles) southwest of Milan, June 11, 2013. REUTERS/Stefano Rellandini

November 13, 2015

By Jan Strupczewski

BRUSSELS (Reuters) – Euro zone economic growth was slower than expected in the third quarter, preliminary data showed on Friday, increasing market expectations that the European Central Bank will step up its monetary stimulus to the economy next month.

The European Union’s statistics office Eurostat said the gross domestic product of the 19 countries sharing the euro expanded 0.3 percent quarter-on-quarter for a 1.6 percent year-on-year increase in the July-September period.

Economists polled by Reuters had expected a 0.4 percent quarterly rise and a 1.7 percent annual increase.

“This outcome is also lower than the ECB’s staff projections, which would add to the already strong case for the ECB to step up monetary stimulus in December,” said Nick Kounis, head of macro and financial markets research at ABN AMRO bank.

“If the ECB needed a final push to be decisive, this is it,” he said.

He expected the ECB to step up the pace of it government bond-buying program by 20 billion euros per month to 80 billion, signal that such purchases would go on beyond September 2016, and expand the eligible universe of assets.

Reuters reported this week that the ECB was considering regional and municipal bonds as an option.

“We also expect a 10 basis point reduction in the ECB’s deposit rate,” Kounis said.

Economists said the slower third-quarter growth was likely to be a result of negative net trade with the rest of the world, which was clear in the case of Germany, France and Italy.

“This suggests that the benefit to euro zone exporters coming from the weak euro was offset by muted global growth,” said Howard Archer, economist at IHS Global Insight.

“Meanwhile, relatively decent euro zone domestic demand supported imports,” he said.

But Eurostat data showed that the euro zone had a seasonally unadjusted trade surplus of 20.5 billion euros in September with exports rising one percent and imports falling one percent year-on-year.

Aggregated euro zone growth was lower than expected mainly because growth in Italy, the Netherlands, Portugal and Finland all underperformed market expectations.

The euro zone’s two biggest economies, Germany and France, both grew in line with expectations at 0.3 percent on a quarterly basis.

But the third biggest Italy, with 0.2 percent quarterly growth, fell short of expectations of a 0.3 percent expansion and the Netherlands grew only 0.1 percent against expectations of 0.3 percent.

Portugal did not grow at all in the third quarter and Finland’s economic contraction was bigger than expected.

(Editing by Jeremy Gaunt.)