Eurozone Economy Slows as French Debt Worries Mount — Update

By Don Nico Forbes and Ed Frankl

The eurozone economy slowed in the third quarter as the war between the U.S. and Iran kept energy prices high, while France's economy contracted, deepening concerns over the government's debt load amid enduring political paralysis.

The eurozone economy grew more strongly than expected in the early months of the war, but that resilience appears to be fading as the period of high energy prices seems likely to extend into 2027. Rising government bond yields, which also lift borrowing costs for households and businesses, are an additional drag on growth.

Gross domestic product in the 21-nation currency area grew 0.4% in the three months through September, the European Union's statistics agency said Friday. This compares with growth of 0.6% in the second quarter.

On an annualized basis, the economy grew 1.7%, compared with 2.6% in the second quarter. This compares with growth of 3.4% in the U.S.

Meanwhile, the French economy shrank unexpectedly in the third quarter, adding to concerns over the country's fiscal outlook. The parlous state of France's public finances, alongside the deadlock in its fractured parliament, has led bond yields on the country's sovereign debt to soar to multidecade highs.

France's public debt is close to 120% of GDP, and its government expects the deficit to rise to 5.4% of GDP in 2026, well above the 3% ceiling targeted by European Union rules. Economic contraction will add to worries about how the government can continue on a sustainable footing with such a debt load.

The headline figure for the eurozone was boosted by the Irish economy, which grew 5.5% in the third quarter, reflecting the outsized influence of multinational companies on its national accounts. Big swings in Irish GDP often impact figures for the eurozone as a whole.

Germany, the eurozone's largest economy, grew 0.2% in the quarter, outperforming expectations of stagnation. Government spending on infrastructure and defense is helping to support activity after years of stagnation, while manufacturers have also benefited from a one-off bump in demand as Asian competitors were hit harder by disruptions in the Middle East.

Business surveys have pointed to further growth for the eurozone in the final quarter of 2026. Still, momentum slowed in October, while companies have reported a renewed acceleration in input costs.

The International Monetary Fund this month raised its forecast for eurozone growth in 2026 to 1.1% from 0.9%, while leaving its 2027 projection unchanged at 1.2%. The fund cited the economy's resilience but warned that energy-price pressures and subdued consumer confidence remained risks to the outlook.

It also raised its eurozone inflation forecasts to 3.1% for 2026 and 2.8% for 2027, both well above the ECB's 2% target.

The European Central Bank kept interest rates unchanged on Thursday, as expected, after raising them in June and September in response to the energy shock. ECB President Christine Lagarde said a strong labor market, robust domestic demand and investment in AI should continue to drive resilience in the eurozone economy, but flagged rising risks.

"The risks to the growth outlook are to the downside," Lagarde said, citing a potential further tightening of global financing conditions or continued conflict in the Middle East.

Global oil prices currently remain above $110 a barrel amid continued concern over supplies from the Middle East. Fears that conflict could escalate following the U.S. midterm elections are keeping markets on edge, with the ECB expected to raise interest rates in December as both oil and natural gas prices drift further from the central bank's baseline assumptions.

The prospect of further disruption is particularly concerning ahead of the winter season, with colder weather set to drive up energy demand and stretch European supplies even further.

Write to Don Nico Forbes at don.forbes@wsj.com and Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

October 30, 2026 06:36 ET (10:36 GMT)