Most of the euro area’s largest economies expanded in the third quarter — with even Germany avoiding the recession it was widely tipped to endure.

Growth quickened in France and held steady in Spain — exceeding expectations. Germany’s surprise 0.2% increase gross domestic product caught analysts off guard, though the reading for the previous three months was revised down sharply.

The weak point was Italy, where output was unexpectedly flat.

On the inflation front, separate data from Spain showed consumer-price gains accelerating a touch to 1.8% but remaining inside the European Central Bank’s (ECB) 2% target.

Wednesday’s data may ease some of the concerns about Europe’s economy that were on display last week when finance officials gathered in Washington for the International Monetary Fund’s (IMF) meetings. Some ECB policymakers argued that the worsening outlook may necessitate heftier interest-rate cuts, while others urged caution.

The euro jumped and German bonds erased gains. Traders pared bets on ECB rate cuts, pricing around a 25% chance of a half-point cut in December. Earlier this month, the implied probability was 50%, according to swap pricing.

The common currency traded 0.3% higher at US$1.0859. The 10-year German yield was flat at 2.34%.

The biggest worries have centred on Germany, whose manufacturing sector is grappling with a loss of competitiveness that executives blame on high energy costs, excessive regulation and shortages of skilled staff. The uncertainty has led consumers to ramp up savings instead of spending the pay rises they received in recent months.

Countries with a bigger focus on services have fared better of late. In October, private-sector output even increased at a faster pace outside of France and Germany, according to business surveys by S&P Global. 

The Olympics temporarily allowed France to paper over underlying weakness that’s weighing on the country’s finances. Like in Spain, household consumption and public spending were the main drivers.

Germany’s malaise is meanwhile having a growing impact on its labour market, which had long remained resilient. Joblessness rose by 27,000 in October, while economists had expected an increase of just 15,000. The unemployment rate held at 6.1%. 

Austria eked out a 0.3% expansion, the most in two years, helped by a rebound in consumption, while Lithuanian GDP growth quickened.

France’s economic improvement offers relief for the government, which faces swollen budget deficits that are undermining investor confidence. With borrowing costs rising relative to European peers, Prime Minister Michel Barnier is trying to push unpopular spending cuts and tax increases through a parliament where he lacks a majority.

“As the lift from the Olympics unwinds in the fourth quarter, it will drag on growth. That will add to downside risks from political uncertainty, tighter financing conditions and fiscal consolidation. We expect the economy to contract marginally in the current quarter, leaving growth for the year at 1.1%,” said Maeva Cousin, senior economist at Bloomberg Economics.

While firmer economic expansion this year is a boon for President Emmanuel Macron, drilling down into the data shows investment dropped 0.8% in the period. Separate figures showed growth in consumer spending slowed in September. Persistent weakness in those areas is a key factor behind plunging tax receipts that are further stretching public finances.

The wider consequences of that pressure are becoming evident. Consumer confidence unexpectedly dipped for the first time since April this month, with households gloomier on future living standards and unemployment becoming a bigger concern.

  - Bloomberg