The Eurozone economy is undergoing a health check! GDP and inflation data will be released soon, and the road to recovery still appears bumpy

According to the Zhitong Finance APP, as European Central Bank policymakers prepare to meet to discuss interest rates, Europe will undergo a stringent economic health check this week, which will help assess the impact of U.S. tariffs on economic growth and inflation. The highlight will be the preliminary GDP data for the Eurozone in the third quarter, set to be released on Thursday. A few hours after this data is published, the European Central Bank will unveil the results of its two-day monetary policy meeting. Analysts expect the Eurozone to maintain a slight growth of 0.1% in the third quarter. Economic reports from some of the region's major economies will provide more details.

Equally important is the Eurozone's inflation data for October, which will be released the following day, with expectations that the inflation rate will drop from 2.2% in September to 2.1%. The European Central Bank will also release a bank lending survey, which will help assess the smooth transmission of monetary policy to the real economy.

This latest data comes on the heels of a turbulent first half of 2025. As businesses attempted to act before the implementation of U.S. tariffs, market activity was initially very active. However, the subsequent reversal was sharply felt, especially in Germany, where output shrank by 0.3% in the second quarter.

The latest data will show how businesses and households are adapting to the trade agreement reached between the EU and the U.S. in July, which set a 15% tariff on most goods leaving the EU. Barclays' chief economist Christian Keller stated, "Despite a strong labor market, consumer confidence remains low, and the GDP data will reveal whether the expected recovery in private consumption has failed to materialize. Against the backdrop of weak domestic demand, external headwinds, and low manufacturing capacity utilization, we also see the risk that investment activity will only gradually recover."

Economic stagnation may not necessarily alarm the European Central Bank. There is widespread expectation that the European Central Bank will keep the deposit facility rate unchanged at 2% this week. With inflation hovering around 2% and forecasts indicating that the economic rebound will gain momentum by the end of the year, most officials are satisfied with maintaining the deposit rate. According to a survey of analysts, rates are likely to remain at this level for the next two years.

The business survey released last Friday brought some hope. With private sector activity unexpectedly reaching its highest level since May 2024, a recovery in the Eurozone economy does indeed seem possible. Germany is the driving force, as the country is set to invest billions of euros in infrastructure and defense, while France, heavily affected by political turmoil, is struggling.

However, some remain skeptical. Ruben Segura-Cayuela, head of European economic research at Bank of America, stated, "We should be cautious about the PMI data, as they have previously sent false signals. But they are consistent with the still-struggling manufacturing conditions and, in the case of Germany, align with the domestic demand dynamics supported at the beginning of the fourth quarter." German Chancellor Olaf Scholz is trying to push the economy out of two years of contraction, as the largest economy in Europe is under scrutiny. Factory data has been weak this summer. The German central bank has warned that third-quarter output "may at best remain flat." Another three months of negative growth would plunge Germany into recession. The Ifo Institute's monthly survey on Monday will indicate whether business confidence has further deteriorated due to concerns that the government has not implemented necessary reforms.

France is also under scrutiny due to political divisions and struggles over how to control its runaway budget deficit. Soeren Radde, head of European economic research at Point72, believes this remains a major risk for the eurozone outlook.

He stated, "I expect eurozone economic growth to accelerate in the fourth quarter, and the strong PMI data in October reinforces this expectation. But if I had to consider a factor that could dampen sentiment in the fourth quarter, I think it would be France. Another risk is that I do not see a catalyst for real improvement in German industry before fiscal stimulus measures take effect next year, and I believe that will take some time."

As for inflation, a slowdown would confirm the European Central Bank's assertion that price growth is currently essentially at target levels. Investors are looking for signs that inflation in the coming months may be weaker than expected, and the European Central Bank has already predicted that inflation will temporarily fall below target next year. Any evidence suggesting that this situation persists or becomes more pronounced could reignite discussions about further interest rate cuts.

Katharine Neiss, chief European economist at PGIM Fixed Income, stated, "Inflation momentum is weakening, and the market believes that inflation risks are firmly skewed to the downside." She sees a risk that inflation could "get stuck" slightly below 2% in 2026