Signs of Economic Growth in the Euro Zone

By Balazs Koranyi
FRANKFURT (Reuters) – The euro zone economy showed some signs of life on Tuesday, with indicators pointing to lukewarm but still positive growth for a bloc that has been skirting a recession for over a year.

Economic Indicators

Industrial output expanded and lending demand rose, while expectations in a key German sentiment survey increased more than predicted, providing reassurance after key indicators had underperformed expectations over the past month.
The figures are likely to reinforce bets that the bloc is still growing, albeit at the slowest pace possible, but are unlikely to prevent the European Central Bank (ECB) from delivering an interest rate cut, which is nearly fully priced in.

Industrial Production

Eurostat reported that industrial production rose by 1.8% on the month in August, slightly exceeding expectations, and was up 0.1% from a year earlier, driven by rising demand for capital and durable consumer goods.
Output in Germany, the bloc's largest economy, surged more than 3% on the month, the biggest rise among the larger economies, even if the annual figure remained deeply negative.

High energy costs, lukewarm demand from China, and increased competition from other producers have weakened Germany's industry in recent years, prompting soul searching over the viability of the country's industry-focused economic model.
ING economist Bert Colijn noted, “Still, expectations about industry remain lacklustre for the rest of the year,” adding that concerns about eurozone industry are numerous, making a vibrant recovery hard to envision.

Investor Sentiment

In another mildly hopeful sign for Germany, investor morale improved more than expected in October, with the ZEW economic sentiment index rising to 13.1 points from 3.6 points in September.
The improved sentiment readings reflect low and stable inflation expectations, bets on further rate cuts, and some mild improvement in export demand, the ZEW reported, adding that China’s recent stimulus measures are nurturing hope for both Germany and the broader euro zone.

ECB Rate Cuts

The ECB has cut rates twice this year and is almost certain to ease again this week while keeping a further move on the table for December as inflation nears its 2% target.
This would amount to a total of one full percentage point of rate cuts, with another percentage point expected next year, suggesting a halving of the benchmark from its previous high of 4%.

Rising loan demand, a precursor to durable economic growth, reflects hopes for lower rates. Demand for bank loans—a key funding source for the corporate sector—rose in the third quarter, with expectations for a further increase in the final three months of the year, driven by household mortgages, according to an ECB survey of top lenders.

Loan Demand Trends

Lending growth has hovered above zero throughout the year as high interest rates and weak growth have stifled demand, diminishing prospects across a bloc skirting recession for years.
“For the first time since the third quarter of 2022, banks reported a moderate net increase in demand from firms for loans or credit lines, while remaining weak overall,” the ECB stated in its quarterly survey of 156 large lenders. “Net demand for housing loans rebounded strongly.”

Lower interest rates prompted corporate loan demand; however, investments had little effect, the ECB noted. Among household customers, the rise in demand was driven by declining interest rates and improving housing market prospects. This quarter, banks anticipate further increases in net demand across all loan segments, especially for housing loans.