Germany Avoids Recession, but Weak Growth Weighs on Europe

The continent’s economy continued to limp along, expanding just 0.4 percent in the latest quarter, dragged down by a loss of competitiveness.

Europe struggled to turn around its economic fortunes in autumn, as Germany, the region’s powerhouse, reported weak growth, offsetting stronger expansion in the continent’s southern countries, the European statistical agency reported on Wednesday.

Economic output in the 20 countries that use the euro grew 0.4 percent from July to September versus the previous quarter. Compared with a year earlier, the eurozone grew 0.9 percent.

The anemic pace is keeping Europe behind the United States, where the economy grew at an estimated 2.8 percent annualized rate in the third quarter, powered by consumer spending and investment.

“Europe’s recovery is falling short of its full potential,” Alfred Kammer, director for the region at the International Monetary Fund, warned last week at a meeting in Washington.

Dragging Europe down is a loss of competitiveness that has continued to weigh on businesses — a problem that Mario Draghi, former head of the European Central Bank, said in a recent landmark report had put Europe’s “reason for being” at risk.

A key reason is that Russia’s war in Ukraine is still taking a toll, the I.M.F. said. Although European governments and businesses have worked to adapt to the loss of Russian gas, stubbornly high energy prices have continued to hammer industries, especially in Germany, whose vaunted manufacturing sector has borne the brunt of the pain, the fund said.

The German economy defied recession expectations, growing 0.2 percent in the third quarter, after a 0.1 percent decline in April to June, Eurostat said. In a sign of deepening woes, Volkswagen, Germany’s largest industrial employer, is threatening major job cuts and factory closures as it struggles to return its flagship brand to profitability.

European consumers have also been sitting on a huge pile of savings, reluctant to unleash spending that could help stimulate the economy as long as the costs of heating their homes and filling gas tanks remain high.

In France, a cost-of-living crisis has crimped household spending and become a major political issue. Those worries were lifted temporarily in the summer when Paris hosted the Olympic Games, with a surge in household consumption and government spending helping to lift growth 0.4 percent from the previous quarter.

But the figure masked underlying weakness in the economy: Investment has slowed and consumers have pulled back on spending since the Games. France is facing further risks to growth in the form of a rapidly widening debt and deficit, which has spurred a politically fragile new government to seek 60 billion euros, about $65 billion, of tax increases and spending cuts next year.

France and Germany together are top drivers of the eurozone economy, and continued slowdowns there have outweighed faster turnarounds in southern European countries that were once the region’s laggards.

Spain is now one of the fastest-growing countries in the bloc, expanding at a 0.8 percent pace in the third quarter on the back of a boom in tourism and a rise in immigration that the government has welcomed to help fuel further economic growth. Portugal’s economy pulled ahead by 0.2 percent from the second quarter.