Our economic outlook for the euro area
August 19, 2024
Our outlook for year-end 2024
0.8%
Economic growth,
year over year
The euro area’s economy grew again in the second quarter despite an unexpected drag from Germany, where a manufacturing sector rebound remains elusive. Euro area GDP grew by 0.3% in the second quarter compared with the first. We anticipate slower third-quarter growth as a two-year manufacturing slump continues.
2.6%
Core inflation, year over year
Energy, food, and core goods inflation are tracking at levels consistent with the 2% inflation target set by the European Central Bank (ECB). Services inflation has reaccelerated in recent months, but we remain confident that it will slow to target-consistent levels by the first half of 2025, driven by a softening labor market and moderating wage growth.
3.25%
Monetary policy rate
The ECB left its deposit facility rate unchanged at 3.75% on July 18, having lowered it by a quarter point at its June 6 meeting. Before that, the policy rate had been at a cycle high of 4% for nine months. We expect a quarterly cadence for future quarter-point cuts, starting in September, leaving the policy rate at 3.25% at the end of 2024 and at 2.25% at the end of 2025.
6.5%
Unemployment rate
We foresee the unemployment rate ending 2024 around current levels. However, lower corporate profit margins skew risks to the upside. Companies were able to sustain or even increase profit margins as the pace of inflation increased and thus could absorb higher wages amid tight labor supply. Such a scenario becomes less likely as prices normalize.
What I’m watching
After five quarters of stagnation, a modest return to growth
The euro area returned to growth in the first quarter of 2024, thanks mainly to higher exports. The growth outlook is an important factor driving underlying inflation trends and will be a key input into monetary policymaking. We expect quarterly growth rates of 0.3%–0.4% (nonannualized) for the rest of the year, which would leave euro area growth at 0.8% for 2024 as a whole.
Shaan Raithatha,
Vanguard Senior Economist
Sources: Vanguard calculations using data from Eurostat as of June 7, 2024.
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