The Eurozone economy has been weakening since early this year as inflation started to surge and central banks turned massively hawkish. Manufacturing and services have fallen into contraction, with manufacturing doing so in July, while services fell below the line in September and remain there despite the slight improvement this month, as the reports released on Tuesday showed.

Other economic indicators such as consumer confidence and investor sentiment are also deeply negative. But, the Eurozone economy is resisting falling into recession as the GDP reports have shown. The German GDP number released on Friday showed a bigger-than-expected expansion in Q3.

German Q3 Final GDP Report

• Q3 final GDP +0.4% vs +0.3% prelim
• Non-seasonally adjusted GDP +1.2% vs +1.1% prelim
• Working day adjusted GDP +1.3% vs +1.2% prelim

The GDP report reaffirms a slight expansion in the German economy in Q3 but amid fears of an energy crunch and declining consumption, Q4 looks likely to mark a contraction and the focus now is on whether there will be a prolonged recession to follow.

Meanwhile, the gap between the 2-year and 10-year German bund yields fell to -27 bps on Thursday, which was the widest inversion since October 1992. That gap has narrowed slightly now to -24 bps but long story short, an inversion of the yield curve as such is typically a signal that recession fears are building.

As we look towards next year, soaring inflation pressures and the ongoing energy crunch will continue to put pressure on the European economic outlook. The only consolation so far is that the start of winter has presented milder weather than anticipated. But as long as price pressures stay elevated, the ECB will be locked between a rock and a hard place in trying to keep with tightening policy further or look towards pausing as the economy starts to run into the ground.

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