The euro-area economy maintained its solid pace of expansion in the third quarter, keeping it on track for its best annual performance in a decade.
Gross domestic product rose 0.6 percent in the period, unchanged from a flash estimate, the European Union’s statistics office said on Tuesday. In Germany, the region’s largest economy, expansion accelerated to 0.8 percent, while Italy’s picked up to 0.5 percent.
Supported by monetary stimulus from the European Central Bank, the economy of the single currency has picked itself up from a period of record unemployment and near deflation. Now, the European Commission says its heading for its best growth since before the financial crisis and it’s being cited by the IMF as the main reason for a global growth upgrade last month.
The euro strengthened after the data were released, climbing to $1.1715, up 0.4 percent on the day at 11:17 am in Frankfurt.
The ECB is taking credit for putting the euro economy back on its feet after a crisis that threatened the survival of the currency union. Vice President Vitor Constancio said that policy makers have been “highly successful” in driving the recovery with interest-rate cuts and stimulus programmes.
His Executive Board colleague Benoit Coeure argued that the region’s upswing is probably the strongest in two decades in terms of “robustness and balance,” creating scope for structural reforms that would come as policy makers scale back monetary stimulus.
The appetite for such measures is currently being tested in Germany, where Chancellor Angela Merkel entered the final stretch of preliminary talks to form a new government, with factions in the complex multi-party negotiations remaining far apart.
Any decisions taken by the future coalition partners on whether to cut taxes or funnel more money into education and digital infrastructure will impact Germany’s growth prospects. The rate of economic expansion over the next two years looks set to exceed the pace.
“As cumbersome and as difficult as the coalition talks in Berlin are currently are, spending more money in our view remains the easiest-to-agree-on common denominator for any next German government,” Carsten Brzeski, chief economist at ING-Bank AG said. “There are plenty of ingredients for another extension of the current golden cycle.”
In Germany, the jump in gross domestic product was driven by exports, while investment improved as companies spent more on new equipment.
Eastern EU growth speeds up on ‘spending’
Economic growth in the EU’s eastern members picked up in the third quarter as rising wages propelled consumer spending.
While the expansion of gross domestic product accelerated across the region from the previous quarter, Romania delivered the biggest surprise, with an 8.8 percent advance, significantly exceeding a median estimate of 6.2 percent in a Bloomberg survey. Czech and Polish growth also topped analysts’ predictions. On the other hand, Hungary slightly missed a 3.6 percent estimate, probably putting the government’s goal of 4.1 percent this year out of reach.
The recovery in the euro area fuelled demand for exports from the EU’s former communist states, while loose fiscal policy and record-low unemployment buoyed consumer spending. The resulting increase in wages helped the countries grow faster than their richer counterparts, but some, like Romania, risk a surge in inflation that may constrain growth in the future. The quicker-than-forecast expansion may prompt interest rate tightening.
“We still think growth will slow in 2018, but today’s data mean the risks to our forecasts lie to the upside,” Liam Carson, an analyst at Capital Economics in London, said in a note on Tuesday. “In the meantime, these strong GDP data support our view that interest rates will be hiked sooner and by more than most expect across the region.”
The Czech economy grew 5 percent from 12 months earlier, a two-year high, and Poland’s expanded by 4.7 percent, the fastest since 2011. Slovak output disappointed, rising 3.3 percent, a touch below the median estimate in a Bloomberg survey.
Romania eclipsed other EU members as tax cuts and wage hikes boosted consumption. Still, risks are piling up, with rising imports widening the current-account deficit. Central bank Governor Mugur Isarescu warned that, to ensure growth is sustainable, the Balkan state must address a labour shortage, increase its use of EU development funds and refrain from stimulating consumption further.
The leu gained 0.1 percent against the euro, after losing almost 1 percent this month because of fiscal uncertainties and rising imbalances in the economy. Economists predict growth will moderate in the coming quarters as wage growth drives inflation higher and prompts central banks to tighten monetary policy. The European Commission forecast a slowdown in all eastern EU members recently.