Eurozone economy shrinks due to squeeze

The Eurozone’s GDP shrank over the last three months, while inflation fell faster than analysts had predicted. This indicates that the European Central Bank has tightened the economy’s belt more than it was expected to.

Eurostat’s flash figures show that the output of the 20 euro-using countries contracted by 0.1 percent in the three month period ending September. This is a reverse from the previous quarter, when the growth rate was 0.2 percent. Analysts expected that the eurozone’s economy would remain flat over the three-month period.

Germany is the only major economy within the currency bloc that has seen GDP fall by 0.1 percent in the last quarter. France’s GDP increased by 0.1%, Italy stagnated and Spain grew 0.30%.

These figures show how aggressively the European Central Bank has been fighting inflation.

Christine Lagarde and the ECB’s governing council raised the eurozone’s base rate to a new record of 4%, even though the group left rates unchanged last week for the first meeting in ten.

Bert Colijn is a senior economist for the eurozone at ING. The Dutch bank said that a drop in GDP in the eurozone keeps a small recession in 2023 a real prospect.

Eurostat data showed that, while the ECB tightening cycle magnified the recession risk, it also helped to bring down inflation from a high of 10.6 percent in August, to 2.9 percent in October. This was the lowest level in over two years.

The drop in energy prices last month, which was much larger than the 4.3 percent recorded in September, was mostly due to favourable comparisons with the price spike of last year.

In the eurozone, Belgium has the lowest rate of inflation at -1.7%. Germany, France and Spain all had rates between 3 and 4.5 percent, respectively.

The UK’s inflation rate is the highest of the G7 countries at 6.7%.