The German economy grew at a pace exceeding expectations during the third quarter of the year, despite the turmoil related to the war with Iran, but economists warned that growth still depends largely on government spending.
Preliminary data issued by the German Statistical Office on Friday showed that the gross domestic product rose by 0.2 percent compared to the previous quarter, exceeding the expectations of analysts polled by Reuters for an increase of 0.1 percent.
On an annual basis, the economy grew by 1.3 percent after accounting for the impact of price changes.
Household consumption and government spending rose slightly during the third quarter, while the strong export growth seen in the first half of 2026 slowed significantly, the statistics office said.
Data indicate that Europe's largest economy recorded its fourth consecutive quarter of recovery, supported by increased public spending on infrastructure and defense, at a time when private sector momentum remains weak.
The economy grew by 0.3 percent during the second quarter, and 0.4 percent during the first quarter, according to the Census Bureau.
Government spending is driving the recovery
Analysts pointed out that increased government spending on infrastructure and defense was the main driver of the economic recovery.
“Without this artificial boost from the government, economic output would likely have stagnated,” said Alexander Krueger, chief economist at Bitman Hall.
For his part, Jens Oliver Niklisch, economist at LBBW Bank, said that next year will reveal whether the economic recovery is sustainable or just a passing improvement.
He added: “To achieve higher and sustainable growth, investment must increase much more, which has not happened so far.”
The German government expects the economy to grow by 1.3 percent in 2026, and 1.1 percent in 2027. The Ministry of Economy said earlier this month that the war with Iran and the resulting rise in energy prices are not harming the economy as much as feared.
In an additional positive indicator, the business climate index issued by the Ifo Economic Institute and widely followed, rose for the sixth month in a row in October.
US Treasury bond prices rose on Friday, with yields heading towards recording their largest monthly decline since late 2023, with a sharp selling wave in technology company stocks, against the backdrop of concerns about spending on artificial intelligence, prompting investors to search for safe haven assets.
The yield on 10-year US Treasury bonds, the benchmark yield, fell by 6 basis points to 4.925 percent, heading towards a decline of 36 basis points during October, which is the largest monthly decline since December 2023. Yields move inversely with bond prices.
Futures for the Nasdaq index, which focuses on technology stocks, fell by 2 percent on Friday, after the business results of Amazon and Intel raised investor concerns about whether the huge costs of investing in artificial intelligence infrastructure will achieve sufficient returns.
Amazon shares fell by 7 percent in pre-market trading, after the company announced large cash outflows and a new increase in spending. On the other hand, Intel shares fell by 25 percent in pre-opening trading, after the chip maker warned that it would record a cash drain during the current year.
These results add to the negative atmosphere in the stock markets, after Alphabet shares witnessed the largest selling wave in its history in the previous session, which led to the erasure of about $500 billion from its market value, following disappointing results for investors.
Analysts at investment bank ING said in a note issued on Friday that “Treasury bonds continue to respond strongly to fluctuations in sentiment associated with artificial intelligence ratings and stock market turmoil.”
Two-year Treasury bond yields fell by 6 basis points, while 30-year bond yields fell by 4 basis points, with US bonds outperforming their global counterparts.
The rise in US Treasury bonds in recent weeks has halted a sharp selling wave that had pushed yields to their highest levels in decades, amid investors' concern about rising energy costs and inflation in government debt.
In early October, the yield on 10-year Treasury bonds reached its highest level since 2002 at 5.365 percent, and the yield on 30-year bonds reached its highest level in 24 years.
But bonds regained their gains with the Nasdaq index falling by 3 percent during October, and the widely watched Philadelphia Semiconductor Index falling by 9 percent, reflecting the continued position of the Treasury bond market as a safe haven for investors.
The decline in revenues came despite data issued Thursday showing that the US economy grew at the fastest pace in a year during the third quarter, while personal consumption expenditures inflation recorded a noticeable increase in September.
On Friday, financial market transactions indicated a probability of about 75 percent for the Federal Reserve to raise interest rates in December, after the central bank kept borrowing costs unchanged on Wednesday, within a range between 3.75 and 4.00 percent.
France is facing increasing economic and financial pressures, after official data showed that its economy contracted unexpectedly during the third quarter, coinciding with the acceleration of inflation and the rise in borrowing costs to record levels in more than two decades, at a time when popular protests are escalating over the rising costs of living, and the government’s efforts are faltering to approve a budget that limits the public finance deficit.
On Friday, the French 10-year bond yield rose by 6 basis points to 4.944 percent, lagging the performance of the rest of the euro zone markets. In contrast, Italian 10-year bond yields rose by two basis points, while German yields fell by one basis point. Returns move inversely with prices.
The rise in borrowing costs pushed the spread between French and German bond yields, a measure of the risk premium associated with French bonds, to 160 basis points, after it reached 177 basis points last week, recording its highest levels since the 2011 euro zone crisis.
France has come under more pressure than others during a global sell-off in government bond markets, driven by rising energy prices and concerns about public debt levels. Last week, French 10-year bond yields recorded their highest levels since 2002, exceeding 5.14 percent, with investors focusing on the widening deficit and the difficulty of approving the budget, amid escalating political and social tensions.
Data from the National Institute of Statistics and Economic Studies (INSI) showed a contraction in GDP by 0.1 percent during the three months ending in September, after the economy recorded a recession in the second quarter, and contracted by 0.2 percent during the first quarter. Thus, the French economy has not achieved any growth since the beginning of the year.
Meanwhile, inflation accelerated to 3.4 percent year-on-year in October, compared to 3.1 percent in September, recording the fastest pace since January 2024.
French Finance Minister Roland Lescure said that the economy may be “headed towards the wall” if the government is unable to approve a budget that reduces the deficit soon.
He added, in statements to France Info radio, that “if we fail to achieve the transformation specified by the budget, we will be heading straight to the wall,” noting that the country has not witnessed any growth during three consecutive quarters, and that the economy is in a state of stagnation during the year 2026.
These indicators make it more difficult for the government to achieve its expectations of economic growth of 0.5 percent during the current year, or even reach more conservative estimates of 0.4 percent, according to the National Institute of Statistics and the Bank of France.
It also raises doubts about the government's ability to reduce the budget deficit to 5.0 percent of GDP in 2027, after the expected deficit for 2026 reached about 5.4 percent.
Klaus Vestesen, chief euro zone economist at Pantheon Macroeconomics, said that the data “are not reassuring, and will increase pressure to accelerate and expand the pace of fiscal consolidation.”
For his part, Maxime Darmet, an economist at Allianz Trade, said that France will start in 2027 from a very weak starting point in terms of growth, adding that this raises questions about the credibility of deficit reduction efforts.
He warned that the country could enter a "vicious circle", as weak growth prompts investors to demand a higher risk premium on French bonds, which in turn increases borrowing costs and pressures economic activity.
Sylvain Persinger, of the consulting firm Persingico, agreed that the outlook is quite bleak, warning that a prolonged political and financial crisis, especially if the upcoming elections do not result in a clear political direction, could exacerbate the public debt crisis and push the country into a more severe economic and political crisis.
These challenges coincide with the escalation of popular protests due to the high costs of living and social inequality, as student groups and others prepare to organize new movements over the weekend, amid official warnings of the dangers of widespread security unrest.
French Interior Minister Laurent Nunez said on Thursday that Saturday appeared to be “very high risk” in terms of public security, announcing the redeployment of 70,000 members of the security forces, after protests two weeks ago witnessed some of the worst riots the country has known in years.
Popular demands to increase government spending make it more difficult to adopt austerity measures and reduce the deficit, at a time when the country is preparing for the presidential elections scheduled for the spring of next year, amid investors’ fears of the continued expansion of public spending.
Interest rate hike expectations
On the monetary policy front, financial markets were expecting, on Friday, a probability of approximately 90 percent to raise European interest rates during December, after the European Central Bank kept borrowing costs unchanged at 2.5 percent, on Thursday, but hinted at the possibility of increasing them next month.
Traders are also monitoring news regarding the person who might succeed European Central Bank President Christine Lagarde, after she announced her intention to step down in February 2027. Dutchman Klaas Knot and Spaniard Pablo Hernandez de Cos are widely seen as the most prominent candidates for the position.
In energy markets, prices rose on Friday after an attack on an oil tanker in the Strait of Hormuz highlighted the risks to supplies, and Brent crude rose by 2 percent to $117 a barrel, approaching its highest levels since April.
On the other hand, US Treasury bonds, and to a lesser extent German bonds, benefited from a new wave of selling in technology stocks, after the results of major companies in the field of artificial intelligence raised investors’ concerns about high spending. US 10-year Treasury bond yields fell by 6 basis points, as investors turned to safe assets.
As for the two-year German bond yield, which is most affected by the European Central Bank's interest rate expectations, there was no significant change, settling at 3.052 percent.
