Eurozone Economy Slows Slightly as Inflation Target Remains Elusive

By Paul Hannon Features Dow Jones Newswires

The eurozone economy slowed slightly in the three months through September, while the annual rate of inflation fell, a combination that will likely reinforce the European Central Bank's caution as it starts to scale down its stimulus measures.

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Despite the third-quarter deceleration, the eurozone economy appears on course for its strongest year since 2007. With the U.S. economy also picking up, that should nudge the global economy toward its fastest expansion since 2014.

But there is a missing ingredient in both expansions that is likely to limit their pace and how quickly inflation rises: big wage increases.

The European Union's statistics agency said Tuesday the eurozone's gross domestic product--a broad measure of the goods and services produced by an economy--grew by 0.6% in the three months to September, a slowdown from the 0.7% growth rate recorded in the three months through June. Compared with the same period a year earlier, GDP was up by 2.5%.

France's economy expanded by 0.5%, a slowdown from 0.6% in the previous quarter, but again pointing to a stronger 2017. Figure released Monday showed the economies of Spain and Belgium also slowed. Data for other eurozone members will be released in coming weeks.

ECB President Mario Draghi cited Thursday an "increasingly robust and broad-based" recovery as justification for his decision to cut the monthly rate of bond purchases to EUR30 billion ($35 billion) from EUR60 billion at the start of 2018.

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That was seen as a first step toward removing the massive support provided to the economy by policy makers since mid-2014, although Mr. Draghi stressed the need for "patience, persistence and prudence" and made it clear the bond-buying program could be extended again beyond its tentatively scheduled termination in September 2018.

The main reason for that caution is that there have yet to be "convincing signs" inflation is heading sustainably higher. That was confirmed by other figures from Eurostat on Tuesday showing consumer prices were 1.4% higher in October than a year earlier, having increased by 1.5% in September.

The decline in the headline rate of inflation won't come as a surprise to policy makers, who expect the inflation rate to fall steadily through the early months of 2018 as a result of what statisticians call "base effects"--a situation in which rising energy prices a year ago are compared with more static prices now.

More worryingly for the ECB, the annual rise in services prices slowed sharply to 1.2% from 1.5%, a sign that domestic inflationary pressures have weakened. Indeed, the measure of core inflation--which excludes volatile items such as food and energy--slipped to 0.9% from 1.1%.

Over the longer term, the outlook for inflation and the economy will depend on whether further declines in unemployment materialize and whether they lead to a pickup in wages and household spending. There was good news on that front in September, as the jobless rate fell to 8.9% from 9.0%, reaching its lowest level since January 2009 as 96,000 people found work.

However, many economists doubt wages will rise quickly, thanks to a combination of hidden economic slack, technological developments and changes to the way pay is negotiated that have weakened the bargaining position of workers.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

October 31, 2017 06:22 ET (10:22 GMT)