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Euro zone economy grows faster than expected in third quarter, supports ECB QE decision
October 31, 2017 / 10:40 AM / 24 days ago

Euro zone economy grows faster than expected in third quarter, supports ECB QE decision

BRUSSELS (Reuters) - The euro zone economy grew faster than expected last quarter and unemployment fell to its lowest in almost nine years, backing up the European Central Bank’s move to begin reducing its bond buying despite slightly soft inflation this month.

The European Union’s statistics office Eurostat estimated that the gross domestic product of the 19 countries that use the euro grew 0.6 percent in July-September from the previous three months and was 2.5 percent higher than in the same period of 2016.

Economists polled by Reuters had expected a 0.5 percent quarterly rise and a 2.4 percent year-on-year gain.

“The better-than-expected GDP print – along with our leading indicators – suggests that growth remains robust, thus supporting the recent ECB QE recalibration,” Morgan Stanley economists Daniele Antonucci and Joao Almeida wrote in a note.

Last week the ECB took its first step towards weaning the euro zone off ultra-loose money by saying that from January it will halve the amount of bonds it buys every month to 30 billion euros. It nevertheless promised years of stimulus and left the door open to backtracking.

The economic growth helped bring down euro zone unemployment to the lowest level since January 2009, beating market expectations.

A woman visits the floating flower market in Amsterdam, April 26, 2013. REUTERS/Cris Toala Olivares

The unemployment rate fell to 8.9 percent of the workforce or 14.513 million people in September from a downwardly revised 9.0 percent, or 14.609 million, in August. Economists polled by Reuters had expected an unemployment rate of 9.0 percent.

But consumer price growth in October eased to 1.4 percent year-on-year, a Eurostat estimate showed, from 1.5 percent in the previous two months. The ECB wants to see headline inflation below but close to 2 percent over a two-year horizon.

The slower inflation was mainly because of slower growth of energy prices, which rose 3.0 percent year-on-year in October, slowing from 3.9 percent in September, offsetting equally volatile unprocessed food prices which rose 2.8 percent after 1.5 percent in September.

Measured without these two most volatile components, inflation slowed to 1.1 percent in October from 1.3 percent in September.

“Strong growth supports the notion that core inflation should eventually normalise further, while headline inflation is likely to print lower for some time and follow a V-shaped trajectory, to come closer to the ECB target from late 2018,” the Morgan Stanley analysts wrote.

“Despite today’s downside surprise, core HICP has inflected higher since the ‘local’ low of 0.7 percent in March, albeit gradually and from a low level. It should get back to its long-term average of 1.5 percent in the second half of 2018,” it said.

Reporting By Jan Strupczewski; Editing by Catherine Evans and Hugh Lawson

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