Europe continues to grapple with low economic growth

Europe needs to focus more on overcoming structural challenges that remain at the heart of the euro-zone, as economic growth remains subdued in the third quarter of 2018, according to analysts.

"Our view is that investors should worry less about the weakness of the latest activity data and more about the stand-off between Brussels and Rome, and Italy’s perilous fiscal trajectory," Neil Shearing, group chief economist, Capital Economics, said in a new report.

While the US economy grew by 0.9 percent (3.5 percent annualized) in Q3, the euro-zone grew by mere 0.2 percent (or 0.6 percent annualized). Italy’s economy stagnated while Germany’s economy was estimated to have increased by 0.1-0.2 percent.

The slowdown in euro-zone growth was in large part by the disruption to auto sectors caused by the rollout of new emissions tests, Shearing said, adding Italy and Germany were hit hard compared to France and Spain.

Italian bond yields rise

In its latest report, Columbia Threadneedle Investments, a US-based financial services provider, said the Italian stand-off has delivered a straightforward valuation shock as the additional yield offered to investors to hold Italian government bonds in lieu of German or French government bonds jumped to levels last seen during the Euro sovereign debt crisis.

"This has helped push up corporate bond spreads and equity discount rates, hurting asset prices. Our judgement today is that cool heads will prevail in the stand-off and that this European political risk will diminish," Toby Nangle, global head of asset allocation, head of multi-asset, EMEA, Columbia Threadneedle Investments, noted.

"But the longer the stand-off continues, the more meaningful the drag on fundamentals," he added.

UK economy faces challenges

Although the UK's third quarter of 2018 GDP grew 0.6 percent quarter-on-quarter, Swiss private bank Julius Baer believes slowing business investment will be a drag on growth in the fourth quarter.

It expects Q4 GDP to grow at 0.2 percent, with 2018 full-year growth to average 1.3 percent.

"Overall, the headline growth rate looks strong, but faltering business investment is a major drag and suggests lower growth in the current fourth quarter," said David Alexander Meier, Macro Research, Julius Baer.

"If Prime Minister Theresa May can push through a soft Brexit deal, keeping the UK in the EU’s customs union, investments have the potential to rise again after the split.

“The optimism that a Brexit deal is near is strengthening the pound and brightening its outlook,” Meier added.