Eurozone economic data came in stronger than market expectations, reinforcing bets that the European Central Bank will raise interest rates again in December.
According to data released Friday by Eurostat, the 21-nation euro area's gross domestic product expanded 0.4% quarter-on-quarter in the third quarter, in line with the preliminary estimate published in late October and double what analysts had anticipated at the time.
However, growth slowed from 0.6% in the second quarter, indicating that while the eurozone economy retains some resilience, the recovery momentum is not steadily strengthening.
Performance among major economies remained clearly divergent. Spain posted 0.6% quarter-on-quarter GDP growth in the third quarter, Germany grew 0.2%, Italy was essentially flat, and France contracted 0.1%. This means overall eurozone growth has yet to translate into synchronized recovery across all member states, with some larger economies still under considerable pressure.
Meanwhile, inflation data have further intensified policy pressure on the ECB. Preliminary data published by Eurostat on November 4 showed the eurozone's harmonized index of consumer prices rose 4.0% year-on-year in October, up from 3.8% in September and double the ECB's 2% target.
Energy prices surged 20.8% year-on-year, accelerating further from 18.9% in September; services price growth edged up from 3.2% to 3.3%, while food, alcohol and tobacco prices rose from 1.3% to 1.6%.
Notably, core inflation excluding energy, food, alcohol and tobacco also climbed from 2.5% in September to 2.5% in October; the rate excluding energy alone held steady at 2.3%. This suggests that although energy prices are the main driver of the current inflation rebound, services prices and certain non-energy goods prices remain sticky, and inflationary pressure is not confined solely to the energy sector.
Changes in inflation expectations also warrant attention. The ECB's fourth-quarter Survey of Professional Forecasters, published October 30, showed respondents raised their forecasts for headline and core inflation in 2026 and 2027 due to higher energy prices and their indirect effects. Eurozone headline inflation is now expected to reach 3.0% in 2026 and 2.6% in 2027, revised up by 0.3 and 0.4 percentage points respectively from the previous survey. Core inflation is projected at 2.4% in 2026 and 2.5% in 2027. Still, respondents expect longer-term inflation expectations to remain anchored at 2.0%, suggesting the market does not yet widely believe inflation will spiral out of control over the long term.
Against the backdrop of resilient growth and inflation, expectations for a December ECB rate hike have risen markedly. A survey published November 12 showed all 71 economists polled expect the ECB to raise rates by 25 basis points at its December meeting, lifting the deposit rate from the current 2.50% to 2.75%. If realized, the deposit rate would rise to the upper bound of what some economists consider the neutral rate range, implying monetary policy could shift from mildly restrictive to a more constrained stance.
However, economists remain divided on the policy path beyond December. Of the 71 respondents, 46 expect the December hike to be the last move in this tightening cycle, while 25 believe the ECB may raise rates further in early 2027. Market pricing also indicates investors expect the ECB to deliver two to three cumulative rate hikes by the end of 2027.
Economists' upward revisions to growth forecasts have also somewhat strengthened the ECB's room to continue tightening. The survey showed respondents expect the eurozone economy to grow 1.1% in 2026 and 1.3% in 2027.
For the ECB, the most critical question now is how far the energy price shock will translate into persistent inflation. Middle East conflict not only directly drives up crude oil, natural gas and electricity prices, but may also gradually raise corporate costs through transportation, chemicals, manufacturing and food production. If companies pass on higher costs to consumers, the energy shock could evolve from a short-term supply disruption into broader price pressure. Especially with services prices still sticky, the ECB needs to guard against energy price increases fueling wage demands and rising inflation expectations, thereby creating second-round inflation effects.
Energy supply and winter demand will be important variables to watch in the coming months. European natural gas inventory levels, winter temperatures, liquefied natural gas supply conditions, and whether the Middle East situation further deteriorates could all affect energy price trends. If the Iran conflict continues to disrupt global energy trade, or winter heating demand exceeds expectations, natural gas and electricity prices could rise again, forcing the ECB to adopt a more hawkish policy stance. Conversely, if regional tensions ease and energy supply recovers, falling energy inflation could reduce the need for further rate hikes.
Wages and the labor market are also key factors determining the ECB's policy path. Even if energy prices decline, if wage growth remains strong, companies may still pass on labor costs through higher services prices, making it difficult for core inflation to return quickly to the 2% target. The ECB's fourth-quarter Survey of Professional Forecasters projects eurozone wage growth of 3.3% in 2026 and 3.1% in 2027. Although slowing from longer-term levels, the relationship between wage growth and labor productivity still warrants attention. If wage growth continues to outpace productivity growth, services inflation may remain resilient.
The recent sharp rise in bond yields constitutes another policy variable. Higher government bond yields raise financing costs for businesses and households, thereby tightening overall financial conditions and weighing on investment, consumption and economic growth. For eurozone member states with heavier debt burdens, rising financing costs could also increase fiscal pressure and lead to further divergence in financial conditions across countries. If bond market adjustments continue, financial conditions may already be tightening in practice even without further ECB rate hikes. This would make policymakers more cautious in assessing the need for continued tightening to avoid excessive damage to the economy.
Moreover, divergent economic performance within the eurozone may also constrain the ECB's room for maneuver. In the third quarter, Germany's economy grew just 0.2%, Italy was essentially stagnant, and France contracted quarter-on-quarter, while economies such as Spain maintained relatively rapid growth. A single monetary policy cannot simultaneously suit all member states' economic conditions. If energy prices remain elevated for an extended period while financing costs continue to rise, economies with stronger industrial bases and greater energy needs could be hit more severely, further widening growth gaps within the eurozone.
From the perspective of the ECB's policy framework, the current situation presents a classic dilemma: on one hand, inflation at 4.0% is well above the 2% target, and core inflation and services prices show no sufficiently clear cooling trend; on the other hand, economic growth, while better than expected, remains in a moderate expansion, and rising bond yields and the energy shock could drag on activity in coming quarters. Bundesbank President Joachim Nagel said this week that policymakers may have to start taking measures that dampen economic growth to achieve the inflation target. This remark signals that internal ECB discussions on further tightening are no longer limited to responding to energy price increases, but have begun to consider whether demand restraint is needed to prevent inflation from deviating from target over the long term.
The ECB's future policy decisions will still depend on multiple indicators including energy price trends, core inflation, wage growth, economic activity and financial conditions. The ECB also needs to judge whether the current inflation uptick stems mainly from a temporary energy supply shock or has already begun transmitting to broader goods and services prices.
Overall, the eurozone's stronger-than-expected third-quarter GDP performance, October inflation rising to 4.0%, and economists' upward revisions to future inflation forecasts have collectively strengthened the case for another ECB rate hike in December. The prevailing expectation among markets and economists now clearly leans toward a 25 basis point increase, but whether this hike will be the last move in this tightening cycle still depends on whether the energy shock eases in coming months, whether core inflation remains persistently sticky, and whether the economic drag from rising bond yields becomes more pronounced.
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