Euro Zone Sees Drop in Inflation and Contraction in Economy
October 31, 2023
The euro zone experienced a drop in inflation and a contraction in its economy in the third quarter, according to recent data released. Inflation across the 20-country common currency bloc fell to a two-year low of 2.9% in October, down from 4.3% the previous month. This figure was below the consensus estimate of 3.1% from a Reuters poll of economists.
Furthermore, core inflation, which excludes volatile food and energy prices, decreased to 4.2% year-on-year in October, compared to 4.5% in September, as reported by the European Union statistics agency Eurostat.
Eurostat mentioned that the main components of euro area inflation showed food, alcohol, and tobacco with the highest annual rate in October at 7.5%, compared to 8.8% in September. Services followed with a 4.6% annual rate, down from 4.7% in September. Non-energy industrial goods decreased to 3.5% from 4.1%, and energy recorded a significant decrease of -11.1%, compared to -4.6% in September.
Adding to the economic concerns, the euro zone economy contracted by 0.1% in the third quarter, according to flash estimates, falling below consensus estimates for GDP to remain unchanged from the previous quarter.
The European Central Bank (ECB) predicts that the euro zone economy will only grow by 0.7% this year, followed by a 1% growth in 2024 and 1.5% in 2025.
Germany, the largest economy in Europe, recorded a 0.1% quarterly decline in GDP for the third quarter, slightly better than the forecasted 0.3% decline. On a price-adjusted basis, the German economy shrank 0.8% compared to the same period last year.
The growth and inflation differences among the euro zone countries remain wide-ranging. Latvia reported the highest quarterly growth in the third quarter at 0.6%, followed by Belgium and Spain at 0.5% and 0.3%, respectively. Ireland had the highest quarterly decline at 1.8%, followed by Austria at 0.6%.
For the past 18 months, the euro zone has been struggling with high inflation, with the consumer price index reaching a peak of 10.6% in October 2022.
The European Central Bank responded to the inflationary pressures by implementing 10 consecutive interest rate hikes, reaching a record high of 4%. However, the ECB chose to pause last week despite the upside risks to energy costs resulting from the ongoing Israel-Hamas war.