Euro zone inflation and economic growth have both slowed due to the impact of European Central Bank (ECB) interest rate hikes. Inflation in the euro zone reached a two-year low just a month after the economy started contracting. According to data released today, euro zone consumer prices increased by only 2.9% in October, the slowest pace since July 2021 when the ECB was concerned about inflation remaining below its 2% target.
The decline in inflation, which was previously in the double digits just a year ago, has had a significant impact. The euro zone economy contracted by 0.1% in the three months leading up to September, potentially putting it on the brink of a recession. Economists, who had anticipated 0.0% quarterly growth and a 0.2% year-on-year increase, were disappointed.
While some countries in the euro zone experienced modest quarterly growth, such as France (0.1%), Spain (0.3%), and Belgium (0.5%), this was offset by a 0.1% quarterly decline in Germany and no growth in Italy. Several countries, including Austria, Portugal, Ireland, Estonia, and Lithuania, also saw contractions in their economies.
The data also revealed that Ireland’s GDP decreased by 1.8% in the third quarter compared to the previous quarter, and it was 4.7% lower compared to the same period last year.
As a result of this economic slowdown and declining inflation, it is highly likely that the ECB will not pursue further interest rate hikes, especially after a streak of 10 consecutive rate hikes. Analysts believe the ECB will now closely monitor the effects of these rate hikes before making any further decisions.
While headline inflation has fallen in recent months, driven by the significant increase in energy prices recorded a year earlier, the ECB’s preferred measure of inflation, which excludes energy, food, alcohol, and tobacco, has also declined to 4.2%, the lowest level since July 2022. The ECB expects this measure to gradually move towards its 2% target by 2025, although this may prove to be a challenging and slow process.
Overall, it appears that the economic environment is weakening, but a severe recession is not imminent. However, ongoing economic and geopolitical uncertainty, combined with the impact of higher interest rates on the economy, are expected to continue weighing on economic activity in the coming quarters.