San Francisco Frontiers - Recession fears stalk Europe despite surprise German growth

Europeans are bracing for a difficult winter as Russia crimps gas supplies in the wake of the Ukraine war, sending heating bills soaring and worsening a cost-of-living squeeze for millions.

Despite the gloomy outlook, Germany surprised analysts by posting growth of 0.3 percent quarter-on-quarter, driven mainly by consumer spending.

France and Spain meanwhile reported 0.2 percent growth each from July to September, a sharp slowdown however from the 0.5 and 1.5 percent expansion they saw in the previous quarter.

"The German economy managed to hold its ground despite... the continuing Covid-19 pandemic, supply chain interruptions, rising prices and the war in Ukraine," federal statistics agency Destatis said about the preliminary data.

Germany narrowly eked out 0.1 percent growth in the second quarter, surpassing analyst predictions that Europe's biggest economy would shrink by 0.2 percent in the third quarter.

But economists warned that Friday's data merely provided a brief respite and that a downturn was coming, as Russia's war in Ukraine sends food and especially energy costs surging.

The fallout from the war has fuelled eurozone inflation, running at a record 9.9 percent in September, depressing household income and raising costs for companies.

"Today's positive growth data is a welcome surprise. However, it does not mean that the German economy will be able to prevent a recession," said ING economist Carsten Brzeski.

"The recession is only delayed, not cancelled."

- 'Last hurrah' -

Germany, whose energy-hungry industries are key to its success as an export nation, was heavily reliant on Russian gas before the war and it has been hit harder than other EU nations by Moscow's gas cut.

The German government expects the economy to shrink by 0.4 percent in 2023.

In France, the EU's second-largest economy, strong business investment helped to keep momentum going but the post-lockdown boost in the services sector was fading, analysts said.

Anaemic French growth in the third quarter might be "the last hurrah before the recession," said Maxime Darmet, an economist at Allianz Trade.

And with consumer prices in France soaring to their highest level since 1985, households "will feel severely the fall in their purchasing power," Darmet said.

French President Emmanuel Macron recently promised to support households through the difficult times in a rare TV interview, after the country was hobbled by weeks of strikes over pay by workers at oil refineries and fuel depots.

In Spain, the slowing growth was largely down to poor performance in the real estate sector, where activity contracted by 2.5 percent, and a drop in exports and business investment.

Only a strong tourism season and robust domestic demand spared the country from a contraction, said ING economist Wouter Thierie.

But with many of the country's indicators flashing red, "we forecast a mild recession for the Spanish economy in the next two quarters," he said.

The European Central Bank on Thursday rolled out another bumper interest rate hike to combat inflation but acknowledged that higher borrowing costs would deepen the economic pain.

The likelihood of a eurozone recession was "looming much more on the horizon," ECB chief Christine Lagarde said.

Q.Nelson--SFF