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Eurozone Economy Grows Faster Than Expected Amid Trade Concerns

The eurozone economy expanded at a faster pace than anticipated in the third quarter of 2024, despite ongoing trade tensions and the looming threat of tariffs from a potential Donald Trump presidency. According to Eurostat, the gross domestic product (GDP) for the 20 countries using the euro grew by 0.4% compared to the previous quarter, surpassing expectations of a 0.2% increase.

Year-on-year, the bloc’s GDP growth accelerated to 0.9% from 0.6% in the previous quarter, maintaining a trajectory that points toward full-year growth of around 1%. However, this figure remains below the eurozone’s ‘potential’ growth rate, which reflects its natural capacity for expansion without external shocks or stimulus measures.

Germany, the eurozone’s largest economy, surprised analysts by achieving a 0.2% growth in the third quarter, despite widespread predictions of a recession due to challenges in its substantial industrial sector. France and Spain also demonstrated unexpected resilience, contributing to the overall positive economic performance. However, the eurozone still trails behind the United States, which is projected to report a steady annual growth rate of 3%, fueled by robust consumer spending and government budget allocations.

The disparity in growth rates raises concerns that the gap between the US and eurozone economies could widen further. In his campaign, Trump has proposed significant tariffs, including a 10% levy on imports from all countries and a staggering 60% on imports from China, suggesting that Europe would face serious economic repercussions if he were to win the presidency. Any new tariffs could provoke retaliatory measures, increasing costs and stifling global trade—an essential driver for the eurozone’s open economy, which relies heavily on the smooth movement of goods.

The situation is further complicated by rising tensions with China. The EU recently decided to increase tariffs on Chinese-built electric vehicles to as high as 45.3% following a trade investigation, prompting concerns of retaliation from Beijing.

Despite the third quarter’s growth figures, the eurozone has been grappling with stagnation, hovering just above zero for much of the past two years. The industrial sector has faced severe challenges, including soaring energy costs stemming from Russia’s invasion of Ukraine, shifts in consumer preferences in the automotive industry, and China’s own economic slowdown, which has reduced demand from traditional European customers.

Volkswagen reported a staggering 42% decline in operating profit due to weak performance in its core passenger car unit and rising costs associated with model updates. While households were expected to compensate for industrial weakness through increased spending, consumer consumption remained tepid, with families opting to save rather than spend.

Looking ahead, economic growth could face additional pressure from budgetary constraints, as many eurozone governments are expected to curtail spending after previous years of budget expansion. Meanwhile, the broader European Union, which includes non-eurozone countries, saw a modest growth of 0.3%, with annual growth climbing to 0.9% from 0.8%.

Economists predict that the final quarter of the year will mirror recent trends, with signs of stabilization in industry and a rebound in consumer sentiment from previous lows.

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