Skip to main content

A woman runs with her dog on an iron footbridge in front of a new national library and opera building under construction in southern Athens, on Friday, Nov. 14, 2014. A surprisingly solid performance by France and confirmation that Greece has come out of one of the developed world's deepest recessions in living memory helped the 18-country euro zone grow by more than anticipated in the third quarter of the year, official figures showed.Petros Giannakouris/The Associated Press

The euro zone's economy expanded in the third quarter, removing any immediate threat of another recession, but growth was so weak that the European Central Bank is likely to launch more stimulus measures.

The region's economy expanded by 0.2 per cent, according to Eurostat, slightly ahead of economists' forecasts, after recording essentially flat growth in the second quarter. The growth was driven by a modest rebound in Germany and France, both of which had been on the verge of contraction. German output rose 0.1 per cent in the second quarter while France's rose 0.3 per cent.

The laggard, as usual, was Italy, the euro zone's third largest economy, with a 0.1-per-cent fall. Italian gross domestic product has not been in positive territory since 2011, marking one of its longest contractions since the Second World War. Italy's non-recovery, however, could give Prime Minister Matteo Renzi more ammunition to launch his labour reform package, which is being fiercely resisted by the unions and even some members of his own centre-left party.

Cyprus was the only other euro zone member to register a GDP contraction, meaning that 26 of the 28 economies are expanding again. But compared to Britain, which is a member of the European Union but not the euro zone, the overall growth is anemic and wholly incapable of bringing down its double-digit jobless rate quickly. Britain is growing at about 3 per cent and its unemployment is plummeting.

The bright spot in the euro zone was Greece, which can now claim that its six-year recession is finally over. Its GDP rose 0.7 per cent in the third quarter, taking year-on-year growth to 1.4 per cent.

The growth figure will come as welcome news to the pro-austerity, centre-right government of Prime Minister Antonis Samaras, who wants to remove Greece from the international bailout program that has deprived it off its economic sovereignty since 2010. He is gambling that an exit from the program will improve his political fortunes ahead of a possible snap election early next year. In Greece, the radical left, anti-austerity party, Syriza, is leading the polls.

If the German economy had not expanded, euro zone growth might have been flat again. Germany's second-quarter growth figure was revised from a 0.2-per-cent decline to a 0.1-per-cent rise, suggesting that the economy is somewhat stronger than analysts had forecast a few months ago.

"The Germany economy is nowhere near any abyss," said ING Bank economist Carsten Brzeski. "With low unemployment rates, record-high employment and a highly competitive industry, it seems as if Germans can manufacture stagnations better than the rest of the world."

But he warned that Germany's weak growth signals that the country "could use a new reform impulse rather sooner than later."

Germany, however, seem unlikely to launch a massive spending and investment campaign to get the economy rolling. The government of Chancellor Angela Merkel continues to preach the merits of austerity and debt reduction; it has pledged to eliminate the budget deficit in 2015. Germany recently announced it would spend euros 10-billion on infrastructure, but the figure amounts to an insignificant 0.1 per cent of GDP.

Germany's reluctance to unleash more stimulus spending means the ECB is still under pressure to do the heavy lifting. It has already launched a series of unconventional stimulus and deflation-busting measures, including a negative deposit rate and the purchase of covered bonds. The weak growth figures published today can only push the ECB closer to full-blown quantitative easing.

Some economists think the euro zone can build on its growth in the second quarter. "We believe that the significant decline in oil prices, which, if sustained, is equivalent to a tax cut of at least 0.5 per cent of GDP, is likely to support domestic demand in the coming quarters," said ING's Peter Vanden Houte. "On top of that, the weakening of the euro exchange rate should give some breathing space to European exporters."

The European stock markets were down slightly after the GDP figures were released and Brent crude rose less than 1 per cent after a losing week.