Ongoing Growth Across the Channel

With two months left in the year, the global economy continues to weather trade and political uncertainty—with the latest evidence coming from Continental Europe. For all the discussion over tariffs and local political turbulence in financial publications we follow, the eurozone economy continues faring better than many think, a big reason we remain bullish about non-US stock markets, especially on the Continent. In our view, the latest data show predictions of political instability knocking economic activity—and inflation (rising prices economywide) potentially resurging—continue to ring hollow.

The Eurozone’s Resilient Growth

Eurozone Q3 gross domestic product (GDP, a government-produced measure of economic output) rose 0.2% q/q (0.9% annualised), up from Q2’s 0.1% q/q (0.5% annualised).^[i] A 0.9% annualised growth rate isn’t gangbusters and reflected two large economies’ meagre results: Germany’s flat quarter and Italy’s -0.2% annualised contraction.^[ii] That said, Germany’s flatness was an improvement from Q2’s -0.8% annualised slip.^[iii] Moreover, German statistics agency Destatis also revised Q2 GDP’s contraction up from an earlier estimate of -0.3% q/q—summertime output wasn’t as weak as initially reported.^[iv]

Amongst the 20-member currency bloc, only 3 nations reporting thus far (Lithuania, Ireland and Finland) contracted on a quarter-over-quarter basis.^[v] Now, GDP has its limits like any other economic indicator. Take the case of Ireland, which has long been attractive to globally orientated companies due to its low-tax environment.^[vi] The multinational tech and pharmaceutical firms headquartered in Ireland can hugely distort the Emerald Isle’s GDP since their accounting moves swing exports, overshadowing domestic developments.^[vii] But overall, we think Q3 GDP data indicate most eurozone economies are plodding along despite the uncertain global trade environment.

On the Big Two

France, the eurozone’s second-largest economy, delivered the biggest surprise based on our reading of financial headline coverage after GDP grew 0.5% q/q (2.0% annualised), beating expectations of 0.2% q/q.^[viii] Net trade (exports minus imports) was the biggest contributor, adding 0.9 percentage point to growth, though we don’t think this is automatically all positive. Though exports jumped 2.2% q/q, imports slipped -0.4%.^[ix] Based on how GDP is calculated, trade added to France’s headline growth, but imports represent domestic demand—so their contraction isn’t anything to cheer, in our view. And this follows a rather big uptick in Q2 imports (1.4% q/q), so it may be a matter of importers fearing tariff effects then, leaving a pothole behind.^[x] Imports aside, other domestic demand measures pointed positively. Household consumption grew 0.1% q/q, repeating Q2’s pace, and gross fixed capital formation (a measure of investment) accelerated from 0.0% to 0.4%, led by investment in services (excluding construction).^[xi]

Now, Q3 GDP activity occurred before France’s politically volatile October, so it is possible last month’s theatrics discouraged some spending or investment. But French political uncertainty has dotted financial coverage we follow since President Emmanuel Macron called a snap election in June 2024. Back then, we read many analyses forecasting how uncertainty would hit growth. Yet from Q2 2024 – Q3 2025, French GDP contracted just once in six quarters—political instability hasn’t roiled French output.^[xii]

On the flipside, German GDP—the eurozone’s largest—was unchanged in Q3.^[xiii] As we pointed out back in August, German GDP has been bumpy since 2022, including a three-quarter contraction from Q4 2023 – Q2 2024.^[xiv] Q3’s results extend that longer-running trend, in our view. But the lacklustre result is likely short of the expectations of those who thought new Chancellor Friedrich Merz’s public investment plan would turbocharge economic growth.

We had doubts about that from the onset, as our research shows public spending usually takes a while to reach the economy (if it does at all). For instance, Germany just approved its 2025 budget in September, and the government is still identifying which infrastructure investments to pursue.^[xv] By the time it does, clears necessary approvals and breaks ground, we could see an entirely different economic backdrop according to our studies of government spending plans. The German government is still finalising plans on how to subsidise German heavy industry’s electricity costs, despite debating it since 2023 and politicians’ broad agreement some measures need to be taken—and this doesn’t even face permitting issues or construction hurdles.^[xvi] To be clear, we don’t think the German economy needs a government lifeline—based on our review of the economic data, growth is more resilient than many think (with its overlooked services sector offsetting industrial weakness). But we think it is a useful reminder for investors to take politicians’ pledges to boost the economy with a grain of salt—the effects often aren’t as big and timely as many predict.   

Inflation Is Normal. Period.

As speculation about the European Central Bank’s (ECB’s) next move has arisen in financial headlines we follow, eurozone consumer prices rose 2.1% y/y in October, slowing from September’s 2.2%.^[xvii] Amongst the underlying components, only services price growth accelerated (from 3.2% y/y to 3.4%)—all other main categories slowed.^[xviii] We saw some commentators argue the acceleration in services prices could have broader implications for the rest of the economy.

Yes, services prices have risen more quickly than goods prices lately—and have been stubbornly rangebound between 3.0% y/y and 4.0% since January 2024.^[xix] But even after October’s uptick, services inflation remains more than half a percentage point from April’s 4.0%.^[xx] We think investors benefit from not overstating monthly bounciness. Taking a step back, the latest price data confirm eurozone inflation isn’t just returning to normal—it is back to normal. (Exhibit 1)

Exhibit 1: Eurozone Inflation Is Back to Normal

Source: FactSet, as of 3/11/2025. Year-over-year change in Harmonised Index of Consumer Prices (HICP) for the eurozone, Germany, France, Italy and Spain, October 2020 – October 2025. “Eurozone Long-Term Average” based on monthly year-over-year change in the eurozone’s HICP from October 2005 – December 2019 (to remove pandemic-driven skew).

Now, in our view, forward-looking markets incorporated this economic resilience into share prices months ago, but the official data are confirming a better-than-appreciated reality—one of the contributors to budding optimism in the more-dour environment beyond America’s borders.