LDN - Business

Mood sours as euro zone economic growth slows while Italy stagnates

[October 30, 2018] By Francesco Guarascio and Jan Strupczewski

BRUSSELS (Reuters) - The euro zone economy grew less than expected in the third quarter as the public mood turned darker, with signs of distress in Italy highlighting concerns that the bloc's third-ranked state is becoming one of its weakest links.

Tuesday's data, suggesting the slowdown has further to run, will make uncomfortable reading for the European Central Bank as it moves toward ending in December the program of asset purchases it introduced in 2015 to boost inflation and economic growth.

Economists said the quarterly growth dip to 0.2 percent from 0.4 percent in the second quarter was unlikely to change those plans, though it might push back the date of the ECB's first post-stimulus hike in interest rates.

"We expect the ECB to stick to its plans to end asset purchases this year, but the recent run of weak data suggests that the bank will stress that policy tightening will depend on the incoming figures," Jessica Hinds, economist at Capital Economics, said.

Tuesday's preliminary flash GDP reading from European statistics office Eurostat, which sent the euro <EUR=> to an intraday low against the dollar, was worse than expected.

Economists polled by Reuters had expected a 0.4 percent rise in the 19 countries sharing the euro. The 0.2 percent reported was the lowest growth pace in more than four years.

Eurostat does not provide national data in its flash estimates, but figures from Italy's statistics agency ISTAT showed growth there stagnated in the third quarter, as the government pursues a war of words with Brussels over a 2019 budget draft that breaks EU rules.

"With budget discussions already tense between Rome and Brussels, this stagnation will only add to concerns," Bert Colijn, economist at ING, said.

Quarterly growth in France, the bloc's second biggest economy, also missed forecasts at 0.4 percent though growth accelerated, data from the INSEE statistics agency showed on Tuesday.

An estimate for Germany, the bloc's largest economy, is not yet available but economists foresee growth is likely to have slowed there too, although the country's jobless total fell in October and employment hit a record high in September.

Meanwhile, inflation in Germany's most populous regions accelerated in October to well above 2 percent, reaching the highest level in many years.

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People wearing signs that read "We want dignity for workers" (R) and "We have work but no salary" protest in front of the Italian Ministry of Labour office in Rome, Italy, October 16, 2018. REUTERS/Tony Gentile/File Photo

That compares with an ECB target of close to but below 2 percent, though Tuesday's German data was not harmonized to compare with other euro zone countries and did not strip out volatile elements such as oil prices, which have risen sharply in recent months.

That suggests price pressures will not be a major factor in shifting ECB decisions at this stage.

CONFIDENCE ON THE SLIDE

Of more concern to policymakers in Frankfurt will be indications that the bloc's economic slowdown could worsen in the final quarter.

The European Commission said on Tuesday that euro zone economic sentiment dropped in October for the tenth consecutive month.

The indicator of managers' and consumers' morale - which rose steadily in 2017 - fell to 109.8 points from 110.9 in September, its biggest dip since March though still above its long-term average.

In October the largest fall was recorded in retail services as managers held "much grimmer views on the present and expected business situation," the Commission said, and the indicator of selling price expectations dropped.

Confidence in industry and services also went down, while consumer sentiment improved slightly.

Morale fell in Germany, France and Italy while it grew in Spain.

In Italy the downward trend began in July, the month after a eurosceptic government took office in Rome.

Outside the euro zone, Britain recorded a slight increase of economic sentiment, driven up by more optimism in retail trade and services which more than offset a fall in industry confidence.

(Reporting by Francesco Guarascio and Jan Strupczewski; editing by John Stonestreet)

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