Euro zone grows quicker than expected but outlook remains weak

By Balazs Koranyi

FRANKFURT (Reuters) -The euro zone economy grew faster than expected last quarter but threats of oversized tariffs from a potential Trump presidency, escalating trade tensions with China and muted consumer confidence are keeping the outlook weak.

Gross domestic product in the 20 countries sharing the euro grew by 0.4% in the third quarter from the previous three months, beating expectations for 0.2% but still showing fragility as industry remained in recession and household consumption barely grew, Eurostat data showed on Wednesday.

Compared to the same quarter a year earlier, the bloc's expansion picked up to 0.9% from 0.6% three months ago, staying on pace for full-year growth at or just under 1%, which is still below what economists consider its 'potential' or natural rate of expansion without shocks or stimulus.

The biggest surprise came from Germany, the bloc's largest economy, which expanded by 0.2% on higher public and private consumption, despite a host of officials predicting a recession given the struggles of its vast industrial sector.

"This does not change the fact that the economy remains stuck in stagnation," ING economist Carsten Brzeski said about Germany.

"The increasing number of insolvencies and individual company announcements of upcoming job restructurings are still hanging like the Sword of Damocles over what has been one of the few strongholds of the economy in recent years: the labour market," he added.

France and Spain also showed unexpected resilience but the figures indicate the bloc is still lagging behind the United States, which has fared better for decades with the advantage gap widening in recent years.

Annual growth in the United States, also due out on Wednesday, is seen holding steady at 3.0% in the third quarter on healthy consumption and copious budget spending.

The growth gap between the two economies could widen further.

U.S. presidential candidate Donald Trump, who has promised to impose a 10% tariff on imports from all countries and 60% duties on imports from China, warned on Tuesday that Europe will pay a "big price" if he wins.

Any fresh tariffs are likely to trigger retaliation, increasing costs and lowering global trade, a long-time driver for Europe, an open economy that has relied heavily on barrier-free movement of goods.

U.S. trade hostility would come on top of already escalating tensions with China after the EU decided overnight to increase tariffs on Chinese-built electric vehicles to as much as 45.3%.

STAGNATION

With future growth looking precarious, Wednesday's figures are unlikely to change expectations that the European Central Bank will cut interest rates in December. But the positive surprise makes a bigger, 50 basis point rate cut unlikely, with markets now pricing steady 25 basis point moves ahead.

Euro zone growth has been hovering not far above zero for most of the past two years as its dominant industrial sector suffered back-to-back blows.

Surging energy costs on Russia's invasion of Ukraine dragged down margins while shifts in car consumption patterns and China's own economic weakness have sapped demand from its traditional customers.

This has weighed on Germany, in particular, with most officials warning that no meaningful rebound was in sight and 2025 was likely to remain below potential too.

Highlighting the bloc's difficulties, Volkswagen reported a 42% plunge in operating profit on Wednesday as a weak performance in the core passenger car unit and high costs, including for model revamps, hit margins.

Indeed, a fresh European Commission sentiment indicator showed a further deterioration in the outlook on Wednesday with industry dragging down the overall index.

(Reporting by Balazs KoranyiEditing by Christina Fincher)