As the United States economy powers ahead, Europe is moving along a very different path: a drawn-out economic slowdown burdened by a double dose of high interest rates and the lingering impact of Russia’s war in Ukraine.
Growth in the eurozone contracted 0.1 percent this summer, more than expected, as record-high interest rates intended to fight inflation blunted economic activity in Germany and France, the region’s two biggest economies, Europe’s statistics agency reported Tuesday.
The anemic pace is in sharp contrast to the United States, where the economy has surged despite a jump in interest rates by Federal Reserve to tame inflation. Gross domestic product expanded 1.2 percent in the third quarter from the previous quarter — a 4.9 percent annual rate — powered by prodigious consumer spending and slowing inflation, which lifted purchasing power.
The downturn reflected the challenges facing policymakers at the European Central Bank, who last week paused their campaign of interest rate increases amid signs that the region’s economy has weakened. Data showed the eurozone’s inflation rate in October eased to 2.9 percent, another indication of the impact of the central bank’s higher interest rates.
Economic output in the 20 nations that use the euro currency declined 0.1 percent from July to September, reversing a mild growth gain in the second quarter and extending nearly a year of tepid economic activity. Compared with the same period a year ago, economic growth in the quarter was up just 0.1 percent.
The E.C.B. has raised interest rates almost in lock step with the Fed to combat skyrocketing energy and food prices stemming from Russia’s war in Ukraine. Along the way, Christine Lagarde, the central bank’s president, has repeatedly sought to tread a fine line between slowing the economy enough to tame price rises — which had caused consumers to trim spending and saddled many businesses with untenable costs — and not tipping the eurozone into a recession.
But the energy crisis “has hit Europe far harder than the U.S., as the U.S. is not dependent on Russian gas and is an oil producer,” said Bert Colijn, senior eurozone economist at ING Bank. “This has weighed on eurozone activity since late last year and kept the economy stagnant.”
Prices at European gas stations and supermarkets have come down from double-digit increases seen just a year ago. Even so, European households have continued to hold on to their savings more tightly than American consumers.
A slowdown in the broader global economy has not helped. Europe has been buffeted by cooler growth, especially in exports to China, the European Union’s biggest trading partner. Countries like Germany that depend heavily on the export of goods, from cars to ovens, for economic wealth are feeling the biggest impact.
“Export-oriented Europe is much more exposed to the cyclical downturn in global manufacturing than the United States,” said Holger Schmieding, chief economist at Berenberg Bank in London.
A sharp recession in Europe is not likely, but “continued economic and geopolitical uncertainty alongside the impact of higher rates on the economy will weigh on economic activity in the coming quarters,” Mr. Colijn of ING said.
The E.C.B. paused its campaign of rate increases earlier this month amid signs the battle over inflation was starting to pay off.
On Tuesday, the statistics agency said in a separate release that consumer prices in the eurozone rose 2.9 percent in the year through October, down from a 4.3 percent rate the previous month and the lowest since July 2021. Although well below the 10 percent rate just a year ago, inflation in Europe remains high overall, especially for food and energy, keeping consumers cautious about spending.
And those high interest rates have also curbed activity among households and companies by sending lending rates higher, restricting the credit needed for purchases and investments. In some cases, they piled more pain on existing problems.
Germany, Europe’s biggest economy, shrank 0.1 percent in the third quarter. The nation’s energy-intensive industrial sector continues to reel from a price shock following the shut-off of natural gas flows from Russia to Germany, which has pushed up inflation and curbed consumer spending.
The French economy also lost momentum, expanding 0.1 percent following a growth spurt in the second quarter. Consumers revved up spending, but a slowdown in the global economy took a toll on French manufacturers, who saw demand for their exports slump. Growth in Italy also stagnated.
The eurozone’s overall performance was skewed to some extent by a substantial decline in growth figures for Ireland, a major exporter of medicines. Exports of pharmaceutical products have been falling since the end of pandemic lockdowns, and growth in Ireland contracted 1.8 percent in summer from the previous quarter.
In a briefing this month, the International Monetary Fund said that Europe was “at a turning point.” The region has weathered a series of shocks, including the pandemic and the energy crisis.
More people have jobs and wages have been rising to keep up with inflation. But food and energy prices remain relatively high — a risk that appeared likely to continue to weigh on growth, the I.M.F. said.
Liz Alderman
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