Eurozone Q3 economic growth may slow; ECB likely to hold steady this week.

Economic growth momentum weakening may become one of the reasons for the European Central Bank to temporarily shelve interest rate hikes. Although most of the current focus in the eurozone is on France's fiscal difficulties and bond market problems, the latest surveys show that data to be released this Friday will show that eurozone economic growth in the third quarter may slow from 0.6% in the second quarter to 0.2%. Meanwhile, several other surveys show that inflation rates in the four largest eurozone economies did not show an obvious broad upward trend in October. Eurozone Q3 economic growth expected to slow The European economy, which has shown strong resilience since the outbreak of the Middle East conflict at the end of February, may be beginning to lose momentum, and business activity is also beginning to show signs of fatigue. Although the overall performance remains good, Simona Delle Chiaie, chief eurozone economist at Bloomberg Economics, believes there is still reason for the market to remain cautious. She said: "The bigger question is what happens next. With inflation continuing at high levels and financial conditions tightening sharply, the downside risks to economic growth are accumulating." During the third quarter, European economic output was hit by multiple factors, including summer heatwaves, low water levels in major waterways, and soaring global bond yields. Since then, the overall environment has deteriorated further, with France facing large-scale protests and growing questions about its public finances. As France's private sector contracted in October, Carrefour SA warned that looting incidents across France would deal a heavy blow to the company's performance. The supermarket operator's shares recorded their worst week since the global financial crisis. As the eurozone's largest economy, Germany has seen some improvement in economic performance after years of difficulties, thanks to large-scale government spending. Even so, the Bundesbank still expects Germany's economy may stagnate in the third quarter. On inflation, the eurozone inflation rate seems destined to rise to 4% by the end of this year, but performance this month has been mixed across countries. This is partly due to Germany's fuel tax relief policy, although analysts also expect Spain's inflation data to ease. Eurozone inflation performance to diverge Eurostat data show that the eurozone inflation rate rose to 3.8% in September, up from 3.2% in August; energy prices rose 18.8% year on year, becoming an important factor driving inflation higher. In response to rising energy prices, governments in many European countries have taken measures such as cutting fuel taxes, intervening in energy prices, and providing subsidies to households and businesses. However, subsidies can only ease the short-term burden and are unlikely to eliminate the root causes of rising energy prices. The surge in energy prices triggered by the Middle East conflict is putting pressure on eurozone inflation. However, policymakers stressed that they have not yet seen second-round effects such as wage increases. Some officials, including ECB Chief Economist Philip Lane, said a "measured" policy response should be sufficient to restore price stability. ECB President Lagarde previously said that the eurozone's high inflation driven by high energy prices has not yet been transmitted to the broader economy. She said ECB officials are assessing "how much of the indirect impact is being transmitted through the economy, and seeing how we can best judge in advance if second-round effects begin to appear." Bank of France Governor Emmanuel Moulin also took a stance similar to Lagarde's on inflation. He said the ECB expects "indirect effects and second-round effects will remain contained," while eurozone core price indicators will only accelerate "modestly." Slowing economic growth and inflation pressures not deteriorating further may have reduced the urgency for the ECB to act. For economists, this means the ECB may wait until December to raise the deposit facility rate for the third and final time, rather than hiking this week. At this week's meeting, the ECB is expected to keep the deposit facility rate unchanged at 2.5%. Institutional views diverge Some institutions remain optimistic about economic growth. BNP Paribas believes that if the volatile Irish economic data are excluded, the European economy still maintained a resilient performance in the third quarter, partly thanks to lower unemployment. However, Jens Eisenschmidt, chief Europe economist at Morgan Stanley, believes risks are gradually accumulating. He listed energy shortages as one of the risks that may be faced in the future. He said: "In the short term, there seems to be no quick-acting solution to the energy crisis. Given Germany's low natural gas storage levels, if winter temperatures are cold, we may even have to consider the risk of energy rationing." The bond market is also a factor to consider. In France alone, the extra yield premium investors demand to hold French 10-year government bonds rather than German bonds of the same maturity has already risen to levels seen during the European debt crisis. ECB President Christine Lagarde said this month that bond yields have risen "significantly" since the September meeting. This change will weigh on economic growth and reduce the extent to which high energy costs are transmitted to the broader economy. Although denying various claims about a debt crisis, Bank of Italy Governor Fabio Panetta still acknowledged last Thursday that the current situation will act as a "drag" on economic growth. Bank of America believes that considering all the above factors, ECB policymakers will want to send a more dovish policy signal at the upcoming meeting than at the September meeting. Bank of America economists led by Ruben Segura-Cayuela said: "Financial conditions remain tight and are likely to tighten further; spreads continue to widen, and France's political situation is exacerbating these pressures." They noted that the ECB "needs to pay more attention than recently to the impact of current developments on economic growth."