Euro zone growth slows to 0.4% as France unexpectedly shrinks

Europe's economy is cooling, but not as fast as feared. Euro zone growth came in at 0.4% for the third quarter in Eurostat's flash estimate on Friday, down from 0.6% in the second quarter yet double the 0.2% economists polled by Reuters had expected.

What happened

The headline hides a wide spread. France unexpectedly contracted by 0.1% between July and September, Germany managed only 0.2%, and Italy was flat. Spain grew 0.6%, and Ireland's volatile figures showed 5.5%, a reading often distorted by multinational accounting.

France is the outlier to watch. Its borrowing costs have climbed as investors question efforts to cut a large deficit, and October brought nationwide unrest over living costs. Spain, by contrast, keeps outpacing the bloc on tourism, domestic demand and a relatively strong fiscal position, despite its own protests and a snap election set for next month.

Why it matters

The data arrive one day after the European Central Bank held rates, saying an energy-price shock had not yet fed into broader second-round effects. Analysts quoted by CNBC still expect one more hike in December because energy costs stay high. Resilient output makes that easier to justify.

MHA's Joe Nellis called the bloc unexpectedly resilient but warned that weak productivity, low investment, ageing populations and fading industrial competitiveness are being masked. He said that unless the Middle East crisis eases soon, energy and transport costs will keep rising into 2027 while consumer confidence stays weak.

Our ECB deposit hold coverage explains the bank's current stance, and the digital euro pilot piece covers its longer-term projects.

Currency and bond markets will read the data through the ECB lens. A bloc growing faster than forecast gives policymakers less reason to wait, but France's contraction and weak consumer confidence argue for caution. Ireland's 5.5% jump flatters the aggregate, so economists often look at the larger economies first. On that basis, the gap between Spain's expansion and France's slip is the clearest sign that the energy shock is not landing evenly across the currency union.

What's next

Flash inflation data and December staff projections will decide the ECB's next step. The release itself is listed on Eurostat's euro indicators page.

Watch French spreads in particular. A second negative quarter would put France in technical recession and complicate any tightening, so euro zone growth figures for the fourth quarter carry unusual weight.

The call

We say the ECB raises rates by 25 basis points at its December 2026 meeting. Polymarket's "Will the ECB announce a 25 bps increase at the December 2026 meeting?" market priced Yes at 86% at 08:23 MSK on Oct. 31. Liquidity is thin, around a few thousand dollars, so the price can jump on small orders. Firmer euro zone growth plus sticky energy costs is the combination hawks wanted.