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Eurostat recently released data show that in the third quarter of this year, eurozone gross domestic product (GDP) fell by 0.1% compared with the previous quarter, and EU GDP increased by 0.1% compared with the previous quarter. Many analysts believe that although the eurozone inflation rate continues to decline, but the impact of interest rate increases on the eurozone economy, coupled with the uncertainty of energy prices in the fourth quarter, the growth prospects of the European economy are still not optimistic.

Preliminary data released by Eurostat on October 31 showed that, on a seasonally adjusted basis, eurozone GDP shrank by 0.1% quarter-on-quarter in the third quarter of this year, while EU GDP grew by 0.1% quarter-on-quarter. In terms of countries, Germany, the EU's largest economy, saw its GDP fall 0.1 per cent from the previous month, Ireland fell 1.8 per cent, and Austria and the Czech Republic also saw declines. However, France and Spain both recorded growth, with month-on-month growth of 0.1% and 0.3% respectively.

At the same time, Eurostat also published October inflation data on the same day. Eurozone inflation fell to an annual rate of 2.9 per cent in October, the lowest in more than two years. Core inflation, which strips out energy, food and alcohol and tobacco prices, was 4.2 per cent. Among them, energy prices fell 11.1% year on year, but food and tobacco and alcohol prices rose 7.5% year on year, non-energy industrial product prices rose 3.5%, and service prices rose 4.6%.

According to the data of the first three quarters of this year, the eurozone economy and the EU economy have not been far from recession. After the second quarter data, ECB officials believed that Europe's economy had achieved a "soft landing", but the third quarter data suggest that this view is a bit optimistic.

In fact, European Central Bank President Christine Lagarde has previously said that the eurozone economy is likely to remain weak throughout the year. Ing recently also released a report pointing out that the eurozone economy is still generally stagnant, and the risk of a technical recession has increased.

Europe's economic malaise is echoed in other data. The eurozone composite purchasing managers' index (PMI) released by Standard & Poor's Global Company on October 24 was 46.5, below the 50-point line between expansion and contraction, hitting a 35-month low. Among them, the manufacturing PMI was 43.1 and the service PMI was 47.8, indicating that both the manufacturing and service industries were shrinking.

A number of media analysis said that the main reasons for Europe's economic difficulties are continued inflation, interest rate hikes, weak exports and so on.

Inflation in Europe began with the rise in energy prices, a large number of enterprises, especially energy-intensive enterprises, reduced production or went out of business due to the increase in production costs, and ordinary people's living costs also rose, and their consumption power fell. Today, energy prices and overall inflation in Europe have fallen sharply, but prices for food, tobacco and alcohol remain high, which also constrains people's spending power.

To control inflation, the ECB has raised interest rates by 450 basis points since July last year, and its three key interest rates - the main refinancing rate, the marginal lending rate and the deposit mechanism rate - are at record highs. However, higher interest rates also lead to higher financing costs for enterprises and suppress business activities.

According to the European Central Bank data, due to the impact of continued interest rate hikes, the eurozone M3 money supply fell 1.3% in August, and fell 1.2% in September.

The economic performance of Germany, the largest economy in the EU, is relatively representative in the EU. In the first three quarters of the German economy, the data were zero growth, 0.1 percent growth and 0.1 percent decline. Private consumption in Germany fell particularly sharply in the third quarter, according to the Federal statistics office. Nearly 30 per cent of companies in loan talks in September said banks were reluctant to lend, according to a survey by the Ifo Institute for Economic Research. According to the report of the German Halle Leibniz Institute for Economic Research, the number of German companies going bankrupt in September continued to be higher than the pre-pandemic level.

Previously, the European Central Bank had cut its forecast for the euro zone to 0.7 percent growth in 2023, and Germany had cut its forecast for 2023 to a contraction of 0.4 percent. The eurozone economic confidence index fell for the sixth consecutive month to 93.3 in October. Some analysts, including ING, believe that the eurozone economy may continue to negative growth in the fourth quarter of this year, leading to a technical recession.

In order to mitigate the negative impact of high interest rates on the economy, the European Central Bank has decided to suspend interest rate hikes on October 26. Ms Lagarde said the current level of interest rates, if held for long enough, would help inflation reach its 2 per cent target. But within the European Central Bank, a pause or cut in interest rates has become a new point of discussion, with some economists arguing that the delayed effect of rate hikes should be fully reflected, and others calling for lower rates to boost the economy.

It is worth noting that the outlook for energy prices in the EU will face uncertainty as winter approaches. The report released by the European Commission shows that the EU energy market remains fragile. The global gas market is currently in a tight supply situation, and the EU is partly dependent on imported gas. If regional events such as the Israeli-Palestinian conflict spill over further, they could impact global energy markets and thus energy prices in the EU.

Analysts note that the effects of inflation and high interest rates on the European economy are expected to continue into next year. In the meantime, the European Union and the European Central Bank will need to make decisions on the trade-off between inflation and growth. Regional conflicts, the global economy and extreme weather will also add uncertainty to Europe's economic outlook. For Europe, the fundamental way to get rid of sluggish growth is to strengthen internal growth drivers, such as the development of renewable energy and digital economy.