Our economic outlook for the euro area

October 17, 2024

Our outlook for year-end 2024

0.6%

Economic growth,
year over year

Recent data suggest that growth concerns are intensifying, underscored by a further weakening in German manufacturing and a softening in external demand. We have lowered our 2024 growth forecast from 0.8% to 0.6%. Euro area GDP grew by 0.2% in the second quarter compared with the first, according to a September 6 estimate, even as Germany’s economy contracted by 0.1%. We anticipate slower third-quarter growth as a two-year manufacturing slump continues.

2.5%

Core inflation, year over year

Services inflation remained sticky in September, even as headline inflation slowed meaningfully. The pace of headline inflation fell to 1.7% year over year, down from 2.2% in August. A sharp 6.1% year-over-year decrease in energy prices drove the decline. The year-over-year pace of core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, slowed marginally for a second straight month, from 2.8% in August to 2.7% in September. Services inflation remained elevated at 3.9% year over year in September, though a 1.1% month-over-month decline suggests progress. We foresee year-over-year core inflation falling to around 2.5% by year-end 2024 before reaching the 2% European Central Bank (ECB) target in 2025.

Monetary policy rate

The balance of risks appears to be shifting for the ECB. Restrictive monetary and fiscal policies are weighing on activity, while price pressures are easing somewhat more quickly than anticipated. We foresee rates being cut to 3% by the end of 2024 and to our assessment of neutral (in a range of 2%–2.5%) by mid-2025. However, we expect the ECB to retain a “data dependent” stance. The ECB announced a 25-basis-point cut to its policy rate, to 3.25%, on October 17.

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. With a pronounced slowdown in Germany and broader growth pressures, we foresee the unemployment rate rising to the high-6% range through 2025.

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.