By Nina Adam in Frankfurt, Paul Hannon in London and Deborah Ball in Rome

Germany's economy slowed more sharply than expected in the third quarter, undermined by a chronic weakness in investment spending across Europe that is unlikely to be eased by growing fears of protectionism following Donald Trump's U.S. presidential election victory.

Italy's economy returned to growth but that is unlikely to sway voters in favor of a referendum on sweeping political reform.

While the Netherlands also recorded a pickup in economic growth during the quarter, the European Union's statistics agency confirmed that the eurozone economy as a whole grew at an annualized rate of 1.4% in the three months to September, little changed from the second quarter.

German investments in plant and machinery remained weak, as slack global demand and an uneasy mix of political risks and regulatory uncertainties kept many companies on the sidelines. Overall, the economy grew at an annualized rate of 0.8%, the weakest pace in a year and well below the U.S.'s annualized growth rate of 2.9%.

Across Europe, investment has been slow to recover from the global financial crisis, an impediment to growth that economists partly attribute to the high levels of political uncertainty that continue to confront businesses.

One immediate worry for businesses is the Italian referendum. Figures released Thursday that showed Italy's economy grew in the third quarter, having stagnated in the second, are the last before a popular referendum slated for Dec. 4.

Proposed by Italian Prime Minister Matteo Renzi, the vote is on an overhaul of the country's legislature that aims to speed up lawmaking and produce more stable governments.

However, since Mr. Renzi has pledged to resign in case of a "no" vote, the ballot has become a vote of confidence on the premier himself and on his economic reforms. With Italy's economy barely growing, frustration with the government has spread, raising the likelihood that the Italians will reject the referendum. The resignation of Mr. Renzi--one of Europe's most reform-minded leaders--could halt the process of overhauling Italy's economy and endanger the meager growth the country has managed to eke out, say economists.

But there are growing uncertainties beyond the eurozone's borders. Business executives and analysts warn that the risks of heightened protectionism in the wake of Mr. Trump's presidency and the U.K.'s pending exit from the European Union could hurt Germany's export prospects in the year ahead.

"Contrary to most of the eurozone, Germany did experience a significant spillover from the U.K. confidence shock following the vote to leave the EU," economists at Citi said in a note to clients. "The surprise result of the U.S. election could have a similar delayed effect as Brexit and temporarily weigh on growth around the turn of the year."

Illustrating this concern, the U.S. in 2015 was the top destination for German exports, with the U.K. following in third place, according to Destatis. Germany's bilateral trade surplus with the U.S. in 2015 accounted for about 1.8% of Germany's GDP.

"If Trump goes ahead and erects trade barriers as planned, the damages will be huge," Clemens Fuest, the president the Ifo institute, said last week. He estimated that 1.5 million jobs in Germany depend on trade with the world's largest economy.

One consequence of greater political turbulence has been a reluctance to invest. In a recent report, Moody's Investors Service estimated that uncertainty about future economic policy had lowered business investment by half a percentage point of annual economic output across the major European countries.

And in a survey of 1,148 chief financial officers at businesses in 17 European countries published Tuesday, business services firm Deloitte found that many are wary of taking on additional risk, and are less inclined to increase spending on plant and machinery than at the start of the year.

"Global investments in machinery and equipment isn't really taking off and this is weighing on German engineering output," said Olaf Wortmann, an economist at VDMA, Europe's largest engineering federation.

A number of Eastern European countries with close links to Germany's manufacturing sector--and particularly its automobile industry--also reported significant slowdowns during the third quarter, including Hungary, Poland and the Czech Republic.

Margit Feher in Budapestcontributed to this article

Write to Nina Adam at nina.adam@wsj.com, Paul Hannon at paul.hannon@wsj.com and Deborah Ball at deborah.ball@wsj.com

(END) Dow Jones Newswires

November 15, 2016 06:08 ET (11:08 GMT)

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