Euro zone economy grows faster than expected in Q3, supports ECB QE decision

Brussels (Reuters): The euro zone economy grew faster than expected last quarter and unemployment fell to its lowest in almost nine years, backing up the European Central Bank’s move to begin reducing its bond buying despite slightly soft inflation this month.

The European Union’s statistics office Eurostat estimated that the gross domestic product of the 19 countries that use the euro grew 0.6% in July-September from the previous three months and was 2.5% higher than in the same period of 2016.

Economists polled by Reuters had expected a 0.5% quarterly rise and a 2.4% year-on-year gain.

“The better-than-expected GDP print – along with our leading indicators – suggests that growth remains robust, thus supporting the recent ECB QE recalibration,” Morgan Stanley economists Daniele Antonucci and Joao Almeida wrote in a note.

Last week the ECB took its first step towards weaning the euro zone off ultra-loose money by saying that from January it will halve the amount of bonds it buys every month to 30 billion euros. It nevertheless promised years of stimulus and left the door open to backtracking. The economic growth helped bring down euro zone unemployment to the lowest level since January 2009, beating market expectations.The unemployment rate fell to 8.9% of the workforce or 14.513 million people in September from a downwardly revised 9.0%, or 14.609 million, in August. Economists polled by Reuters had expected an unemployment rate of 9.0%.

But consumer price growth in October eased to 1.4% year-on-year, a Eurostat estimate showed, from 1.5% in the previous two months. The ECB wants to see headline inflation below but close to 2% over a two-year horizon.

The slower inflation was mainly because of slower growth of energy prices, which rose 3.0% year-on-year in October, slowing from 3.9% in September, offsetting equally volatile unprocessed food prices which rose 2.8% after 1.5% in September.

Measured without these two most volatile components, inflation slowed to 1.1% in October from 1.3% in September.

“Strong growth supports the notion that core inflation should eventually normalise further, while headline inflation is likely to print lower for some time and follow a V-shaped trajectory, to come closer to the ECB target from late 2018,” the Morgan Stanley analysts wrote.

“Despite today’s downside surprise, core HICP has inflected higher since the ‘local’ low of 0.7% in March, albeit gradually and from a low level. It should get back to its long-term average of 1.5% in the second half of 2018,” it said.