Euro Area 2024 Outlook

Growth Outlook: Mild Recession, Then Gradual Recovery

  • Expect a mild recession lasting three quarters from Q3 2023 to Q1 2024, shaving around 0.5% off GDP.
  • Q3 2023 saw -0.1% GDP q-o-q, followed by forecasts of -0.3% in Q4 2023 and -0.1% in Q1 2024.
  • Growth should gradually recover to about 0.3% q-o-q by early 2025.
  • Surveys and hard data were somewhat mixed but now increasingly align, supporting this mild recession view.

Labour Market and Wages

  • For the first time since 2021, positive real wage growth is expected, peaking at 2.4% y-o-y in Q2 2024 as inflation falls.
  • Labour markets remain resilient; unemployment low at 6.5% (Oct 2023) and forecast to rise modestly to 7.0% by end 2024 due to job retention schemes cushioning employment losses.

Inflation Outlook

  • Headline inflation forecasted to fall to 2.1% by Jan 2024, then drop further to 1.5% by Dec 2024.
  • Core inflation expected to decline to below 2% mid-2024, but then hover around 2.3% through end-2024, reaching the ECB’s 2% target consistently only by September 2025.
  • Inflation is driven by wage pressures, especially in services.

Monetary Policy

  • ECB hiking cycle likely over; rates expected to stay steady in early 2024.
  • Rate cuts expected to start in June 2024, with 25bp cuts at each meeting through end-2024, bringing deposit rate down to ~2.75%.
  • Neutral rate estimated between 2.25% and 2.75%, with ECB likely to keep rates near the higher end due to structural inflationary pressures.

Fiscal Policy

  • Less accommodative than post-pandemic years, with major Euro Area countries expected to reduce fiscal deficits but not enough to reach full balance.
  • EU’s re-implementation of fiscal rules will pressure some countries (Belgium, Spain, France, Italy, Latvia, Malta, Slovenia, Slovakia).
  • Political and institutional pressure to maintain fiscal discipline is rising.

Political Risk: 2024 European Parliamentary Election

  • Scheduled for June 6-9, 2024.
  • Rising support for right-wing eurosceptic parties could complicate EU integration efforts and make adoption of new fiscal rules more challenging.

United Kingdom 2024 Outlook

Growth and Inflation

  • Growth slowed but remains resilient, with only a mild and short near-term recession expected.
  • Recent inflation data improved: October 2023 headline CPI dropped from 6.7% to 4.6%, better than expectations.
  • Inflation will take longer to return to target due to sticky upstream services inflation and a tight labour market keeping wage growth elevated.

Monetary Policy

  • Markets price in earlier rate cuts for ECB and Fed, but Bank of England (BoE) likely to delay easing due to sticky inflation and pre-election fiscal support.
  • First BoE rate cut expected in August 2024, with rates falling to 4% by early 2025.

Political Outlook: UK General Election

  • Must be held by January 2025; expected either late spring or autumn 2024.
  • Conservatives likely to avoid early election to allow March budget easing measures to take effect; also avoid poor weather turnout risks.
  • If Labour wins, a major policy shift after 14 years of Conservative rule could follow—specific plans depend on party platform.