Euro area: 2024 outlook

As we move towards 2024, fears the euro area economy will slide into recession remain rife. For our part, we believe number of headwinds facing the euro area could diminish. First, the impact of volatile energy prices is likely to decrease as real disposable income improves thanks to falling inflation, increasing wages and a resilient (albeit weakening) labour market. Second, we expect the drag from monetary tightening to gradually diminish as the ECB stays on hold and begins to lower rates towards the end of H1. Finally, we expect manufacturing activity to improve as inventories fall—although limited global demand may constrain the upside potential.

Overall, we expect the euro area to move sideways until mid-2024 before a modest recovery in H2 2024, with euro area GDP growth averaging 0.6% in 2024 after an estimated 0.5% in 2023. But the risks remain tilted to the downside, with geopolitical uncertainty and fiscal policy (in particular in Germany) posing the major risks to our growth outlook.

Consumer inflation in the euro area could continue to decline in the coming months amid subdued growth and base effects. We see headline inflation falling to the ECB’s medium-term target of 2% by the end of 2024, with headline HICP inflation averaging 2.4% in 2024 (down from 5.5% in 2023) and core inflation also averaging 2.4% (down from 5.0%).

With inflation falling faster than it projected, the ECB is coming under pressure to lower interest rates. We see the first cut coming in June 2024. We have pencilled in a total of 100 bps in rate cuts in 2024, bringing the deposit rate down to 3.0% by the end of the year. Given risks to the growth outlook, risks are tilted towards an earlier cut (i.e. in March). In the background, the ECB will likely continue to reduce its balance sheet at a steady pace. These is some risk of tapering of the Pandemic Emerging Purchase Programme (PEPP) as some of the more hawkish ECB policymakers push for a faster reduction.

Country wise, we expect growth in Germany to remain weak next year given shaky export demand and investments. Following a recent constitutional court ruling, there is a big risk that fiscal policy is tightened more than expected. We see German GDP expanding by 0.3% in 2024, up from -0.1% in 2023. We believe consumer spending will be key to French GDP growth, which we see at 0.6% in 2024, down from 0.9% in 2023. Weak global demand, the impact of high interest rates and the gradual phasing out of tax credits for households are the main risks for the Italian economy. We expect Italian GDP to expand by 0.8% in 2024, slightly up from 0.7% in 2023. But any delays in payouts from the EU’s recovery fund could hurt the growth outlook and raise worries about debt sustainability in a context of still-high interest rates.