By Balazs Koranyi
FRANKFURT (Reuters) – The euro zone economy grew faster than expected last quarter but threats of oversized tariffs from a potential Trump presidency along with escalating trade tensions with China are keeping the outlook muted.
Gross domestic product in the 20 countries sharing the euro grew by 0.4% in the third quarter from the previous three months, beating expectations for 0.2% but still showing some weakness as industry was in recession and household consumption barely grew, Eurostat data showed on Wednesday.
Compared to the same quarter a year earlier, the bloc’s expansion picked up to 0.9% from 0.6% three months ago, staying on pace for full-year growth at or just under 1%, which is below what economists consider its ‘potential’ or natural rate of expansion without shocks or stimulus.
The biggest surprise came from Germany, the bloc’s largest economy, which expanded by 0.2%, despite a host of officials predicting a recession given the struggles of its vast industrial sector.
Although France and Spain also showed unexpected resilience, the figures confirm the bloc continues to lag behind the United States, which has fared better for decades with the advantage gap widening in recent years.
Annual growth in the United States, also due out on Wednesday, is seen holding steady at 3.0% in the third quarter on healthy consumption and copious budget spending.
The growth gap between the two economies could widen further.
U.S. presidential candidate Donald Trump, who has promised to impose a 10% tariff on imports from all countries and 60% duties on imports from China, warned on Tuesday that Europe will pay a “big price” if he wins.
Any fresh tariffs are likely to trigger retaliation, increasing costs and lowering global trade, a long-time driver for Europe, an open economy that has relied heavily on barrier-free movement of goods.
U.S. trade hostility would come on top of already escalating tensions with China after the EU decided overnight to increase tariffs on Chinese-built electric vehicles to as much as 45.3% after a trade investigation that has divided Europe and prompted retaliation from Beijing.
STAGNATION
Euro zone growth has been hovering not far above zero for most of the past two years as its dominant industrial sector suffered back-to-back blows.
Surging energy costs on Russia’s invasion of Ukraine dragged down margins while shifts in car consumption patterns and China’s own economic weakness sapped demand from its traditional customers.
This weighed on Germany with most officials warning that no meaningful rebound was in sight and 2025 was likely to remain below potential, too.
Highlighting the bloc’s difficulties, Volkswagen (ETR:) reported a 42% plunge in operating profit on Wednesday as a weak performance in the core passenger car unit and high costs, including for model revamps, hit margins.
Households were expected to pick up the slack for a weak industrial sector but consumption remained lacklustre as families decided to bump up their savings instead of spending more.
Future growth could also take a hit from budget consolidation as many euro zone governments have spent too much in recent years and will now have to pare back budget largesse.
The broader European Union economy, with non-euro zone members in the bloc’s east, meanwhile expanded by 0.3% after 0.2% three months earlier with the annual rate accelerating to 0.9% from 0.8%.
The final quarter of the year is seen broadly in line with the previous months, economists said, with industry showing some signs of stabilisation and consumer sentiment rebounding from ultra low levels.
