Despite an unexpected contraction in France, the eurozone's second-largest economy, and headwinds including elevated inflation and a bond market selloff, the eurozone economy still expanded at twice the pace analysts had expected.
Data released Friday by Eurostat showed that eurozone third-quarter gross domestic product (GDP) grew 0.4% quarter-on-quarter, compared with economists' expectations of 0.2%.
The stronger-than-expected third-quarter growth came alongside mixed performances among major member states. Germany and Spain posted growth, with third-quarter GDP rising 0.2% and 0.6% quarter-on-quarter respectively (economists had expected 0.1% and 0.6%); Italy's third-quarter GDP was flat quarter-on-quarter, missing economists' forecast of 0.1% growth; and France's third-quarter GDP fell 0.1% quarter-on-quarter, missing economists' forecast of 0.1% growth.
The eurozone's overall third-quarter performance underscored the economy's broader resilience. In the face of the inflation shock from the Middle East war and the heatwaves and drought that affected much of the summer, Europe's economy demonstrated a degree of staying power. But the European Central Bank has flagged downside risks to the economy. The ECB held rates steady this week but could still deliver a third rate hike in December. Meanwhile, although inflationary pressures have not yet spread beyond energy, ECB officials remain vigilant. Another set of data from Italy and France offered little reassurance — consumer prices in the two countries rose 5.6% and 3.8% in October respectively, both the fastest increases since 2023 and above market expectations; while Spain's October inflation rate edged lower as expected, it remained elevated at 4.9%. Inflation rates in France, Italy and Spain are far above the ECB's target level.
The eurozone economy's two main engines are diverging. Buffeted by surging borrowing costs, violent protests and political and budgetary uncertainty, France's economy unexpectedly contracted in the third quarter. France was already the weakest-performing major economy in the eurozone. In the first half of the year, against a backdrop of weak domestic demand, falling investment and heatwave damage to agriculture, France's economy only barely avoided recession. The near-term outlook for France is also far from reassuring. The minority government led by French Prime Minister Sébastien Lecornu is once again heading into a parliamentary standoff over austerity measures. At the same time, social and political unrest continues in France, with the next presidential election not far off and the far-right currently leading in the polls. French Finance Minister Roland Lescure said in an interview on Friday: "In 2026, with an unprecedented convergence of external and internal shocks, the French economy has stalled. The economy must be restarted. We need to restore confidence, and to do that, passing a budget is essential, because it will allow us to lower interest rates." Economist Jean Dalbard said: "The French economy is entering the final quarter without growth momentum, and the risks to the economy are clearly tilted to the downside. France's economy unexpectedly contracted 0.1% in the third quarter, while the market had expected growth of 0.1%. Trade volatility explains why actual performance fell so far short of expectations. More worryingly, investment fell sharply again — the third consecutive quarterly decline — and the impact of the recent tightening in financing conditions has not even had enough time to fully show up yet."
By contrast, Germany's economy showed resilience. Despite factors such as low Rhine water levels, Germany's third-quarter GDP still grew 0.2%. A large increase in government spending on infrastructure and defense has brought optimistic expectations for growth. At the same time, Europe's caps on imports of Chinese hybrid vehicles may also benefit German automakers. German Chancellor Merz also plans further measures to try to boost growth through welfare reform and attracting private capital investment.
Italy's third-quarter economic performance was also unsatisfactory. Italy's government expects GDP to grow 1% in 2026. That growth would help fund some of the tax cuts Prime Minister Meloni promised ahead of next year's election. Meloni has also asked the EU for additional fiscal space of about 28 billion euros (about $31.3 billion) for energy and defense spending. But if growth slows, implementing the government's other fiscal commitments will become more difficult, including reducing the budget deficit to below 3% of GDP.
Spain's growth, meanwhile, was mainly driven by domestic demand and trade, showing notable resilience. Spain's central bank cited private consumption, job creation and population growth as factors driving growth. It expects the economy to grow 2.6% in 2026 and 2.2% in 2027, significantly faster than the eurozone as a whole. Spain has largely moved past the effects of political instability, including Prime Minister Sánchez's inability to get the budget passed.
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