Euro area GDP growth remained modest in the third quarter; in October the IMF lowered slightly its GDP growth forecasts for the euro area for this year. The decline in confidence indicators also suggests a continuation of modest euro area growth until the end of the year. The IMF also downgraded its growth forecasts for world trade this year and next, which is strongly related to more protectionist trade policies. It also points to significantly higher risks of lower growth than forecast. The risks to euro area GDP growth are mainly associated with the situation in Italy, which has already started to affect the bond market.
The growth of the export part of the economy has slowed, while the growth of activities oriented predominantly to the domestic market is similar to last year. The strengthening of manufacturing production is somewhat more modest this year in view of lower growth in foreign demand. The growth of goods exports has also moderated slightly in the absence of one-off factors. Meanwhile, activity continues to expand in sectors that mainly rely on domestic demand. In construction particularly the volume of civil-engineering works is on the rise amid increased general and local government investment. Boosted by further growth in household consumption, turnover in trade continues to rise.
Employment growth has also eased amid somewhat weaker economic growth and relatively low unemployment. Especially the growth of employment that arises from the inflow from unemployment is more modest, in part owing to the shortage of appropriate workforce. Some sectors, particularly construction and some service activities, are therefore increasingly hiring foreigners. The year-on-year wage growth in the private sector is higher than last year, reflecting the situation on the labour market and last year’s good business results. Owing to last year’s agreements with the trade unions and regular promotions, wage growth is also higher year on year in the public sector.
Year-on-year consumer price growth, boosted largely by external factors, remains around 2%. Growth is mainly driven by higher prices of fuels and energy as a consequence of oil price rises on world markets. Growth in heat energy prices has also increased more notably in the last few months and prices of electricity started to rise. Food price growth is strengthening gradually again. Growth in service prices remains unchanged, while prices of semi-durable and durable goods are down year on year.
The situation in the banking system is stable; loans to domestic non-banking sectors are steadily rising. Particularly household borrowing is on the rise. The volume of corporate and NFI loans continues to decline, which is related to somewhat higher loan repayments. With banks continuing to deleverage abroad, liabilities to foreign banks account for only around 4% of the banking system’s total assets. The lower volume of foreign funding is more than offset by domestic non-banking sectors’ deposits, where owing to the low deposit interest rates solely overnight deposits are on the rise.
After the favourable third quarter, the general government surplus was significantly higher year on year in the first nine months. The continuation of the improvement in the general government balance was supported not only by favourable economic developments, including labour market conditions and past improvement in business results, but also increased absorption of EU funds.