No cause for celebration over eurozone’s record GDP growth

Most economists expected record-breaking quarterly growth across Europe for the third quarter, but the figures were even better than expected. Yet, nobody is celebrating.

Eurozone real GDP grew by 12.7% quarter-on-quarter in Q3, beating consensus expectations of 9.4%. This comes after an 11.8% contraction in Q2.

This means that year-on-year, GDP is down 4.3% compared to -14.8% in the previous quarter.

The sharp rise in GDP highlights the nature of the recession in Europe, in that it is being caused by restrictions rather than a lack of demand. Once companies were allowed to resume activity, GDP has rebounded. Yet, not all firms have been able to return to normal, as Covid-19 related restrictions have clearly hampered certain services.

Though eurozone GDP has rebounded strongly, it remains 4.3% below the pre-pandemic (Q4 2019) level. Within member states, France led the way with 18.2% growth, while Spain (16.7%) and Italy (16.1%) were close behind. Germany grew by 8.2%, though it’s important to note it had a smaller contraction over the year, so a lower growth rate was to be expected.


As these are preliminary estimates, most member states have not reported any subcomponents.

However, the French release offers some insight. All of the French GDP subcomponents rebounded sharply in Q3, especially household spending, which is close to its pre-crisis peak (-2.1% y/y).

Business investment is lagging behind (-5.1% y/y) despite also rebounding strongly. Given the huge amount of government support, it is no surprise to see government consumption being up on the year (+0.4% y/y).

Finally, trade data remains depressed, with exports down 15.2% y/y and imports down 9.9% y/y, though net trade did make a positive contribution in the quarter.

Overall, the GDP figures are probably as good as could have been hoped for. Yet, concerns are mounting as restrictions are slowly returning as most countries are recording new peaks in the number of coronavirus cases.

France is due to enter another national lockdown which is expected to last for the month of November at least, though the details of recent announcements suggest it will not be quite as severe as the lockdown seen in the spring.

For example, schools will remain open, and people will be allowed to go to work where businesses can still operate safely. The focus is to minimise social mixing. Similarly, Germany has introduced harsher lockdowns, but has not extended them beyond contact services, such as bars, restaurants, gyms etc. Schools and most workplaces will remain open.

The restrictions raise the risk of another contraction in GDP growth in the fourth quarter, but this will largely depend on the scale and length of restrictions. At this moment in time, the restrictions announced should not cause a negative print for the eurozone in the fourth quarter. However, more restrictions could be unveiled in the coming weeks, which might be enough to dent the recovery.

Due to concerns over restrictions, the European Central Bank’s president Christine Lagarde announced at its October press conference that the central bank is ready to add further stimulus by the end of the year.

Most economists expected something to be announced, and an increase or extension of its quantitative easing programme is most likely. The move is unlikely to have any meaningful impact on the economy, but policy makers are under-pressure to show that they are still effective and active.