Euro area Q3 GDP expected to rise 0.3% qoq

Euro area GDP is expected to grow by 0.3% qoq in Q3 15, down from 0.4% in Q2. The apparent slowdown masks improving growth in most countries apart from Greece, where a significant drop (-3.6% qoq) is expected following the imposition of capital controls in lateJune, taking 0.1pp off euro area growth. As before, lower fuel prices, better job creation, a reduced fiscal drag and easy monetary policy are all boosting disposable household income and corporate profit margins, spurring a domestic demand-led recovery. 

Monthly data point to firm consumption of around 0.5% qoq in Q3, while a small negative contribution from net trade is expected. Consumption should also drive growth in Q4 (0.4% qoq). The headwinds from trade with Asia are expected to affect Germany the most among the large euro area countries, although robust US growth is likely to counterbalance the Chinese slowdown. In addition, increased consumption and fiscal spending in relation to the refugee crisis are likely to boost domestic demand. 

The ECB has mainly focused on the external headwinds as a reason to for adding more easing in December. Many Governing Council members argued before the last ECB meeting that the euro area recovery was on track and that more data would be needed before deciding on new measures. Domestic data should in this respect have continued to reassure while the external headwinds still remain mainly risks. In addition, using instruments to weaken the exchange rate (like the deposit rate) would seem futile, as countering the weaker external demand impact would require very large exchange rate movements. 

However, in view of the pessimistic view on the investment recovery and low potential growth, the ECB increasingly worries about long-term inflation. Preemptively fighting low inflation expectation may be another reason for early action, and thus the ECB is expected to take action with a range of instruments in December: 10bp deposit rate cut, adding 10-20bn of asset purchases, extending QE beyond 2016, add corporate bonds (and possibly other assets), and extend the TLTRO.