Eurozone economy slipping, but not slumping

Summary

Eurozone GDP was flat in the fourth quarter, meaning the region narrowly avoided a technical recession during the second half of last year.

Moderate growth in employment and real household incomes and still-subdued sentiment surveys argue against a deep slump in Eurozone activity. However, they do not offer much encouragement for a quick rebound either. We forecast Eurozone GDP growth of 0.7% for 2024, up only slightly from 0.5% in 2023.

Eurozone CPI inflation slowed further in January, while when estimated on a six-month annualized basis, underlying inflation already appears to be trending at a pace broadly consistent with the European Central Bank’s (ECB) 2% inflation target.

Should Eurozone economic growth remain weak enough, and underlying inflation ebb further, we believe the ECB could feel comfortable enough to begin lowering its policy interest rate with a 25 bps cut to 3.75% at its April monetary policy meeting. We also forecast a cumulative 175 bps of rate cuts from the ECB over our forecast horizon through until mid-2025.

Our forecast pace of rate cuts is broadly in line with market implied pricing through September of this year, but somewhat more gradual thereafter. Moreover, we view the risks as likely tilted to ECB rate cuts beginning later, or proceeding more gradually, than our base case.

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