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EU Economy Q4 2023: Steady but Slow

EU 2024 Economic Outlook

Europe has had a mixed year. Energy prices rose in 2023 which slowed down the economy, although recession has been avoided. Even with this, forecasts are positive going into the new year.  “We expect 2024 to be a better year for the Euro area economy for three reasons…First, we look for growth to pick up as these headwinds diminish…Second, we expect underlying inflation to normalise in 2024…Third, we look for a more supportive ECB next year.” (Goldman Sachs)

The high energy costs and their downstream effects have put the brakes on the economy for much of the year, but now that these costs are reducing, industry has started revving up again, and positive growth is on the horizon as an increase in production and cheaper costs to produce will help to grow the economy.

Inflation, the other major player, has also been slowing down through this year. The monetary policy of the ECB is responsible for some of this, but this has been assisted by the industry slowdown, the steady rate of employment, and the cooldown in wage increases. In 2024 the labor market is expected to have a modest increase in the unemployment rate but to remain steady overall. This, combined with the growth in wages from the inflation effects, give hope for stronger consumer spending in 2024, which will help drive growth.

For the past few years, the ECB has been operating on a pattern of high interest rates to combat the inflation fallout from the pandemic. However, as the economy continues to be slow, the ECB can be expected to begin lowering interest rates and give an extra stimulus to the economy later in 2024. All of these indicators together give hope for a slow economy, that will remain steady through the coming year.

Summary

  • Energy prices in Europe rose slowing the economy
  • Inflation slowing partially due to ECB monetary policy
  • Europe avoids recession in 2023
  • 2024 is expected to be better for the European economy than 2024 leading to a ‘steady and slow’ growth outlook
 

 

GDP (Millions of Euros)

 

Source: Eurostat, Gross Domestic Product for European Union (27 Countries from 2020) [CPMNACSCAB1GQEU272020], Federal Reserve Bank of St. Louis. Eurostat, Real Gross Domestic Product for European Union (27 Countries from 2020) [CLVMNACSCAB1GQEU272020], Federal Reserve Bank of St. Louis.

 

CPI (Index 2015=100)

Source: Eurostat, Harmonized Index of Consumer Prices: Transport for European Union (27 countries from 2020) [CP0700EU272020M086NEST], Federal Reserve Bank of St. Louis.

Central Bank

 

Source: European Central Bank, ECB Main Refinancing Operations Rate: Fixed Rate Tenders for Euro Area [ECBMRRFR], Federal Reserve Bank of St. Louis. European Central Bank, ECB Deposit Facility Rate for Euro Area [ECBDFR], Federal Reserve Bank of St. Louis. European Central Bank, ECB Marginal Lending Facility Rate for Euro Area [ECBMLFR], Federal Reserve Bank of St. Louis. European Central Bank, Central Bank Assets for Euro Area (11-19 Countries) [ECBASSETSW], Federal Reserve Bank of St. Louis.

Quotes

Short-term indicators suggest weak economic activity in the fourth quarter of 2023. However, growth is expected to strengthen from early 2024, as real disposable income rises – supported by declining inflation, robust wage growth and resilient employment – and export growth catches up with improvements in foreign demand.

Source: Eurosystem staff macroeconomic projections for the euro area: December 2023.

In 2024, as the indirect effects of past energy and other supply shocks gradually fade, “free lunch” disinflation will peter out and labor costs will play an increasingly important role as a driver of inflation. With tight labor markets, workers are using their bargaining power to recoup lost income which will maintain upward pressure on wage growth and prices, especially in the services sector, where the share of wages in direct input costs is twice as high as in manufacturing. 

Source: European Economic Outlook

We expect 2024 to be a better year for the Euro area economy for three reasons…First, we look for growth to pick up as these headwinds diminish…Second, we expect underlying inflation to normalise in 2024…Third, we look for a more supportive ECB next year.

Source: Euro Area Outlook 2024: Fading Headwinds

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