Shoppers buy fruits at a local market in Nice, France, June 8, 2023. REUTERS/Eric Gaillard/File Photo

By Balazs Koranyi

FRANKFURT (Reuters) -The euro zone economy grew a touch more quickly than expected in the third quarter, lifted by buoyant growth in France and Spain that more than offset faltering exports and persistent struggles in Germany's oversized industrial sector.

The economy of the 20 nations sharing the euro expanded by 0.2% in July to September, Eurostat data showed, beating expectations for 0.1% increase in a Reuters poll and confirming the bloc's resilience despite stagnation in Germany and Italy.

On an annualised basis, the economy grew by 1.3%, Thursday's data showed - ahead of expectations for 1.2% and a level economists consider to be around its natural rate of growth without stimulus.

FRANCE AND SPAIN CARRY THE BLOC

"The mood about the economy seems decently optimistic at the moment, despite ample downside risks clearly weighing on the outlook," ING economist Bert Colijn said. "We do expect a gradual acceleration of growth over the coming year but remain cautious about marking this as the start of a growth spurt."

Spain remained the best performer among the bloc's largest economies, growing 0.6% on the quarter, in line with forecasts, while France expanded by 0.5%, beating expectations for 0.2%. Germany and Italy both stagnated.

Thursday's figures ease pressure on the ECB to cut interest rates any further in the near term as they confirm the central bank's longstanding view that the economy is proving resilient to this year's unusual spike in uncertainty.

Backing the resilience narrative, unemployment held at a near-record low 6.3% in September, separate Eurostat data showed.

GERMANY IS STILL THE PROBLEM CHILD

Germany, which has broadly stagnated for the past three years as its industry lost competitiveness, remains the bloc's problem child but a massive increase in government spending is likely to prop up growth.

It may however take a few more months or even quarters before that spending starts to make its way into the economy, raising the risk of further growth weakness in the near term.

"Leading indicators like the Ifo business climate survey and PMI indices are pointing to a beginning economic recovery in the fourth quarter, but its momentum will remain weak initially given ongoing geopolitical and trade-related uncertainty and negative media perceptions of the initial work of the new German government," Timo Klein at S&P Global Market Intelligence said.

While trade tensions, lingering uncertainty and Chinese dumping of surplus goods could still weigh on growth in the months ahead, economists remain relatively upbeat about the outlook and ECB projections suggest the third quarter may have been the worst for some time.

Growth could pick up as past interest rate cuts work their way through the economy, households sit on ample savings, Germany boosts spending, uncertainty over tariffs eases and inventories continue to run low.

Business activity, as measured by a key Purchasing Managers' Index (PMI) survey, is already showing a pick-up, while sentiment in Germany, the bloc's biggest economy, is improving and business are becoming more optimistic, partly due to lower tariff uncertainty.

But any growth pick-up is likely to be modest as the rigid structure of the euro zone economy limits activity, say economists, who predict growth in the 1.2% to 1.5% range for years to come.

(Reporting by Balazs Koranyi; Editing by Toby Chopra)