Eurozone Q3 GDP beats forecasts, yet details point to weaknesses

• Preliminary data for the euro area showed third-quarter GDP expanding 0.4% quarter-on-quarter, above the 0.2% that was forecast.
• That compared with 0.6% growth in the prior quarter.
• On a year-on-year basis, Q3 GDP rose 1.3%, exceeding the 1.1% prediction.
• The previous year-on-year reading had been 1.2%.

The euro area economy posted a better-than-expected preliminary Q3 GDP figure. However, a closer look reveals several caveats that qualify the positive impression.

Quarterly expansion slowed to 0.4% from 0.6% in the prior quarter, indicating a deceleration in momentum.

Digging into the data provides a more detailed view.

Ireland set the pace with a 5.5% quarterly increase, the strongest among euro area members. Yet the country's GDP has been notoriously volatile in the past year, warranting care. The expansion was driven by multinational-dominated industries, especially information, communication and manufacturing.

Ireland's headline growth figure often gives a distorted read on domestic economic health, as it is heavily shaped by contract manufacturing and global profits of multinational corporations that largely return to foreign shareholders rather than underpinning local living standards.

Spain continued to show strength with 0.6% growth, and the Netherlands also managed a 0.6% increase.

Other major economies fared less well.

Germany grew just 0.2%, Italy stagnated at zero, and France contracted by 0.1%—hardly a sign of resilience among the region's largest economies.

What does this imply for the ECB?

Inflation pressures have risen in France and Spain even as the growth picture stays uneven. While German state inflation data brought some relief, the prevailing worry is that higher energy costs will eventually feed into prices and burden economic activity.

That is exactly the kind of stagflationary squeeze policymakers hope to avoid.

The real question now is whether the euro area can keep its growth momentum as higher prices increasingly squeeze households and businesses. The latest report suggests the economy is holding up somewhat better than anticipated, but whether that continues into the fourth quarter remains uncertain.