The eurozone's economy eked out another quarter of modest growth in the three months to September, shrugging off the U.K.'s surprise decision to leave the European Union, but adding to concerns about its future ability to deliver prosperity.
The EU's statistics agency Monday said the combined economic output of the currency area's 19 members increased 0.3% from the previous quarter. The rate of growth was unchanged from the three months to June, and was consistent with the anemic nature of the economic recovery since it began in mid-2013. At 1.4%, the annualized growth rate was well below the 2.9% recorded by the U.S. and the 2.0% recorded by the U.K. during the same period.
Weak as it was, the continuation of the recovery will come as a relief to eurozone policy makers, who had worried that the U.K.'s June vote to depart the EU would weaken business and consumer confidence, while they also feared the sharp drop in the pound over recent months would hit eurozone exports to its second-largest overseas market.
For rate setters at the European Central Bank, the news was mixed in separate figures published by Eurostat that showed a pickup in the annual rate of inflation to its highest level since June 2014. Consumer prices rose 0.5% in October from a year earlier, a pickup from the 0.4% rate of inflation recorded in September but far short of the ECB's target, which is just below 2%.
However, the measure of core inflation for October?which excludes energy, food, alcohol and tobacco?was unchanged at 0.8% in October for the third straight month, an indication that economic growth has been too weak to raise domestic inflationary pressures.
That mix of weak growth and subdued inflationary pressures will likely cement expectations that the ECB' will decide in December to extend its bond-buying program beyond March 2017, when it is now scheduled to end.
The economy's display of resilience in the months since the vote is unlikely to entirely allay concerns about Brexit's potential to weaken the recovery, particularly when negotiating positions become more clearly drawn early next year. Policy makers fear that if the U.K. government makes restricting migration from the rest of the EU its priority, trade links may suffer, weakening growth across the continent.
"The transition towards the phase of active UK-EU negotiations that will begin in Spring 2017 may trigger a more substantial reassessment of post-Brexit economic prospects," said Philip Lane, a member of the European Central Bank's governing council in a speech Friday. "If the momentum in the negotiations is in the direction of a more severe form of Brexit, this may damage consumer and investor confidence."
Beyond their difficulties in boosting inflation, policy makers worry that a long period of weak expansion will have damaging long-term consequences for the economy's speed limit, or how rapidly it can grow without overheating. The European Commission estimates the eurozone's potential growth rate is just 1%, less than half the equivalent measure for the U.S., reflecting very high rates of unemployment and weak business investment.
"Low potential growth casts a shadow over the long-run economic prospects for the euro area, creating a negative feedback loop," said ECB Chief Economist Peter Praet in a speech Wednesday. "Because low potential growth dampens expectations of future income, it curbs consumption and investment today, which further lowers rates of potential growth tomorrow. This can lead to a permanent destruction of productive capacity, including jobs."
Those worries help explain why ECB President Mario Draghi and some of his colleagues have been more aggressive over recent months in pressing governments to overhaul their economies and boost investment spending.
There are early indications that eurozone economic growth may pick up in the final months of this year. A survey of businesses and consumers released Friday found they were at their most upbeat since the end of 2015 in October, while a survey of purchasing managers released earlier showed a pickup in activity during the same month.
But even those indications point to quarter-to-quarter growth of no more than 0.4%, or the equivalent of 1.6% annualized. Growth is therefore unlikely to be fast enough to advance the pace of job creation, and bring down the eurozone's very high unemployment rate. For those in work, the prospect of sizable pay rises remains distant, while any pickup in inflation will slow the feeble rise in real incomes.
Theeurozone is entering an active period of political decision making. In 2017, both France and Germany will hold elections, with French President Franç ois Hollande and German Chancellor Angela Merkel under pressure from freshly energized populist parties, as well as more traditional rivals. Those votes will be preceded by a Dec. 4 referendum in Italy on key constitutional changes that aim to slim down the country's legislature, speed up lawmaking and attack the bureaucratic morass.
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(END) Dow Jones Newswires
October 31, 2016 06:55 ET (10:55 GMT)
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