Euro-area inflation eased to its lowest level in more than two years as the bloc’s economy shrank following an unprecedented ramp-up in interest rates.
Consumer prices rose 2.9 per cent in October – down from the previous month’s 4.3 per cent and better than the 3.1 per cent median estimate in a Bloomberg survey.
In a separate release, Eurostat said third-quarter gross domestic product fell 0.1 per cent – missing estimates for stagnation.
Tuesday’s data show that while the European Central Bank’s 10 back-to-back rate hikes are helping to bring inflation back towards the 2 per cent goal, they are also taking a toll on households and firms by sending loan costs sharply higher.
In Germany, chemical giant BASF announced earlier in the day that it sees 2023 sales and earnings coming in at the lower end of its guidance, while shoppers at France’s Carrefour continue trading down to cheaper brands.
The GDP reading stands in stark contrast to the US, which last week reported bumper growth between July and September, while also managing to bring down inflation.
The euro stayed 0.4 per cent higher against the US dollar before the Federal Reserve’s policy decision on Wednesday, while German bonds held gains.
Ten-year yields have fallen more than 10 basis points to 2.78 per cent since last week, spurred by recent reports of softer economic growth and price gains from some of the euro area’s 20 members.
Europe’s biggest weak spot is also its largest economy, Germany, which revealed on Monday that output shrank by 0.1 per cent in the third quarter. GDP has barely risen for a year and a recession is now a real possibility.
Still, Italy just dodged such a fate, while France and Spain grew in the three months through September.
The euro zone had so far avoided any quarterly downturns despite the upsurge in prices that was supercharged by Russia’s war in Ukraine. ECB president Christine Lagarde, who oversaw a pause in rates last week, sees subdued output for now.
“The economy is likely to remain weak for the rest of this year,” she said in Athens. “But as inflation falls, further household real incomes recover and the demand for euro-area exports picks up, the economy should strengthen over the coming years.”
Despite the deteriorating backdrop, however, Ms Lagarde stressed again that talk of rate cuts to perk up activity is premature, with officials’ inflation mission still incomplete. Markets are currently betting the ECB’s deposit rate will remain at 4 per cent until at least April.
While elevated borrowing costs should send price gains back to target in 2025, a measure of core pressures that excludes food and energy is retreating less rapidly. It moderated to 4.2 per cent in October from 4.5 per cent the previous month.
At the start of this quarter, output remained in a similarly gloomy state, with private-sector activity suggesting the region’s economy may be succumbing to a mild recession, surveys of purchasing managers signalled.
Nevertheless, outgoing Bank of Italy governor Ignazio Visco said the ECB’s decision to keep rates high is the right one. Such action strikes the “right balance between doing too much and not doing enough,” he said on Tuesday in Rome. BLOOMBERG
