European Central Bank holds rates steady as eurozone growth limps along

BRUSSELS (CN) — The European Central Bank kept interest rates unchanged Thursday despite the eurozone economy growing just 0.2% in the third quarter, betting that inflation risks outweigh signs that U.S. tariffs and Chinese competition are dragging down European manufacturers.

The modest quarterly growth, released by Eurostat on Thursday, came in slightly above expectations but revealed deeper problems: Germany’s economy went nowhere, goods exports fell, and manufacturers warn of more pain ahead as American tariffs continue pressuring the bloc’s industrial base.

The ECB held its deposit rate at 2.0%, with President Christine Lagarde defending the decision by noting inflation remains close to the central bank’s 2% inflation target. Eurozone inflation stood at 2.2% in September, up from 2.0% in August, while the broader EU saw inflation rise to 2.6% from 2.4%.

The U.S. Federal Reserve cut rates Wednesday for the second time this year as inflation continues on the other side of the Atlantic.

The ECB — which sets monetary policy for the 20 countries using the euro — has cut rates multiple times since June 2024 but paused its easing cycle as inflation pressures persist.

“Manufacturing was held back by higher tariffs, still heightened uncertainty and a stronger euro,” Lagarde told reporters in Florence, noting that goods exports have fallen since March as companies stopped front-loading orders ahead of tariff increases. She cautioned, “The full impact of higher tariffs on euro area exports and manufacturing investment will only become visible over time.”

The services sector continued to expand, with tourism and corporate investment in artificial intelligence and IT infrastructure driving growth. But the divergence highlights Europe’s challenge: a split economy where digital services grow while industrial sectors struggle.

Germany’s struggles were particularly stark. Europe’s largest economy posted flat growth after contracting 0.2% in the previous quarter, dragged down by its automotive sector. German car exports to the United States plunged 20% year-over-year in August, hitting a four-year low, according to Oxford Economics. Germany exported 175 billion euros (over $200 billion) worth of goods to the United States in 2024, making it the country’s largest export market.

The automotive sector faces particular pressure, with cars and parts now subject to 15% U.S. tariffs since July, while also grappling with structural headwinds from the electric vehicle transition and intensifying Chinese competition in emerging markets.

While companies rushed to ship products before U.S. tariffs took effect, the longer-term consequences — potential factory closures, investment pullbacks and supply chain restructuring — are still unfolding. European automakers, already grappling with the costly transition to electric vehicles, now face the added burden of restricted access to their largest export market.

Growth varied significantly across the continent. Sweden led with 1.1% quarterly expansion, followed by Portugal at 0.8% and Czechia at 0.7%.

France expanded 0.5% and Spain grew 0.6%, but Italy stagnated after contracting in the previous quarter. Lithuania, Ireland and Finland all saw their economies shrink.

The tepid growth reflected weakness that emerged during the quarter, with August data showing EU industrial production dropping 1% and the trade balance flipping from an 11.4 billion-euro surplus to a 5.8 billion-euro deficit — a nearly $20 billion reversal in a single month. U.S. tariffs cut into exports, particularly in the automotive sector, while Chinese products blocked from U.S. markets increasingly competed in Europe and other regions where European exporters once dominated.

Year-over-year, eurozone growth slowed to 1.3% from 1.5%, while the 27-member European Union grew 1.5%, down from 1.6%.

Unemployment remained stable at 6.3% in the eurozone and 6.0% in the EU in September, according to separate data released Thursday. But the steady rates masked rising joblessness in absolute numbers, with 13.2 million people unemployed across the EU, up 227,000 from a year earlier. In the eurozone, unemployment rose by 187,000 year-over-year.

Lagarde said some risks to growth had eased, citing an EU-U.S. trade deal reached over the summer, a recently announced Middle East ceasefire and a one-year U.S.-China trade truce announced Thursday morning. But her warning that tariff impacts will take time to fully materialize suggests the ECB expects continued pressure on the region’s manufacturers.

The European Union is holding high-level technical discussions with Chinese officials in Brussels on Friday to address similar restrictions on minerals critical to automotive and energy sectors. A European Commission spokesperson said the EU is “fully focused on its own bilateral trade engagement with China, including as this relates to trade in rare earth minerals.”

The EU has also moved to protect its steel industry, slashing duty-free steel imports by 47% and imposing 50% tariffs on excess shipments in response to Chinese products flooding European markets after being blocked from the United States.

The ECB meets again Dec. 18 in Frankfurt, where policymakers will face the same dilemma: whether tepid growth justifies further rate cuts or inflation concerns still take priority. The central bank said rising household incomes and increased government spending on infrastructure and defense should support growth in coming months but acknowledged the global trade environment will continue weighing on the eurozone’s manufacturers.

Courthouse News correspondent Yuval Molina is based in Brussels.