Eurozone to get hard data on tariff damage as ECB sets rates

[FRANKFURT] Europe will get a rigorous economic health-check this week, helping gauge the impact of US tariffs on growth and inflation as policymakers convene to set interest rates.

The main event will be Thursday’s (Oct 30) initial reading of gross domestic product for the eurozone in the third quarter, which arrives just hours before the European Central Bank (ECB) reveals the outcome of its two-day monetary-policy meeting.

Analysts expect the bloc to maintain the minimal 0.1 per cent expansion it managed in the three months to June. National reports from some of the region’s biggest economies will add further colour.

Almost as important will be October’s inflation reading a day later. A dip to 2.1 per cent from last month’s 2.2 per cent is anticipated. The ECB will also publish its Bank Lending Survey, which helps assess how smoothly monetary policy is reaching the real economy.

The updates come on the heels of a volatile first half to 2025. Activity initially hummed as companies sought to get ahead of April’s imposition of US tariffs. But a subsequent reversal was keenly felt, particularly in Germany, where second-quarter output shrank 0.3 per cent.

The latest data will show how businesses and households adjusted to July’s pact between the European Union and the US to set levies for most goods leaving the bloc at 15 per cent.

“Consumer confidence remains subdued despite a robust labour market, and GDP figures will reveal whether the recovery in private consumption anticipated by the ECB continues to fail to materialise,” said Christian Keller, head of economics at Barclays. “Against the backdrop of weak domestic demand, external headwinds, and low capacity utilisation in the manufacturing sector, we also see the risk that investment activity will only recover gradually.”

Stagnation would not necessarily alarm the ECB, which is overwhelmingly expected to keep borrowing costs at 2 per cent when officials gather in Florence, Italy – this year’s choice for the one policy meeting annually held away from its Frankfurt base.

With inflation hovering around 2 per cent and forecasts signalling an economic rebound will gain traction towards year-end, most are content to leave the deposit rate where it is. It may do so for the next two years, according to a poll of analysts by Bloomberg.

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Business surveys published on Friday offered hope that a revival in the euro area’s fortunes will indeed materialise as private-sector activity unexpectedly hit its highest level since May 2024. Germany, which is about to unleash billions of euros of spending on infrastructure and defence, was the driving force as France, rocked again by political turmoil, struggled.

Some remain sceptical.

“We should take PMIs with caution,” said Ruben Segura-Cayuela, Bank of America’s head of Europe Economics Research. “They have sent false signals before. But they are consistent with still a struggling manufacturing sector and, in the case of Germany, supportive domestic demand dynamics at the start of the fourth quarter.”

Europe’s largest economy is under the spotlight as Chancellor Friedrich Merz tries to engineer a recovery from two years of contraction. Factory data this summer were weak, and the Bundesbank has warned that third-quarter output “is likely to flatten at best”.

Another three months of negative growth would plunge Germany into recession. Monday’s monthly survey from the Ifo institute is set to indicate whether confidence among firms has deteriorated further on fears that the government is not implementing the necessary reforms.

France is also in focus due to its fractured politics and the fight over how to rein in its runaway budget deficit. It’s set to remain a major risk for the euro area’s outlook, according to Soeren Radde, who heads European economic research at Point72.

“I expect growth to pick up in the fourth quarter and the strong October PMI print has reinforced that expectation. But if I had to think of a catalyst that will weigh on sentiment in the fourth quarter, I think it would be France,” he said. “The other risk is that I don’t really see a catalyst for an improvement in the German industry until next year, until the fiscal stimulus kicks in, which I think will take some time.”

As for inflation, a slowdown would confirm the ECB’s assertion that price growth is essentially at target for now. Investors are looking for signs that it could come in weaker than expected in the months ahead, with the ECB already predicting a temporary undershoot next year. Any evidence of that dragging on or becoming more pronounced could revive talk of additional rate cuts.

“Inflation momentum is waning and markets see inflation risks as firmly to the downside,” said Katharine Neiss, chief European economist at PGIM Fixed Income. She sees a risk inflation could “get stuck” a little way below 2 per cent in 2026. BLOOMBERG