Euro area, United Kingdom

Our economic and market outlook for 2024

May 16, 2024

Slowing economic activity at the end of 2023 suggests that the rate-hiking cycles of the European Central Bank and the Bank of England are taking hold. We expect both central banks to keep policy restrictive until they’re confident the fight against inflation has been won.

“We expect the intended effects of monetary policy to play out in 2024. The European Central Bank and Bank of England should be able to start cutting rates later in the year as inflationary pressures ease, but rates will settle at a higher level than we’ve grown used to.”

– Jumana Saleheen, Vanguard European Chief Economist

Euro area

Our outlook for year-end 2024

0.5%–1%

Economic growth,
year-over-year

We continue to expect subdued, below-trend growth as the bite from contractionary monetary and fiscal policy intensifies. As inflation falls, however, we expect economic activity eventually to receive a modest boost from gains in real wage growth.

2.2%

Core inflation, year-over-year

The surge in commodities prices driven by the war in Ukraine and sharp rises in goods prices driven by supply-chain disruptions during the pandemic are largely in the past. In 2024, the focus shifts to services inflation, which is closely tied to the labor market. We expect a gradual labor-market softening to drive core inflation close to the 2% target set by the European Central Bank (ECB) by year-end.

3.25%

Monetary policy rate

Stronger growth momentum, higher energy prices, and a more hawkish Federal Reserve outlook have led us to raise our outlook for the year-end European Central Bank deposit facility rate. We foresee three quarter-point rate cuts this year, down from our previous outlook for five such cuts.

6.5%

Unemployment rate

We believe that the labor market is softer than the unemployment rate would suggest. Job vacancy rates, although still high, have receded; labor hoarding remains elevated; and the number of hours worked has stagnated.

What I’m watching

The potency of monetary policy

“Nearly three-quarters of the euro area’s corporate debt is financed through banks—nearly triple the amount in the United States, where companies are far more likely to turn to the capital markets for financing. Much of euro area companies’ debt is therefore fixed for only a short duration, so changes in interest rates—up or down—are felt relatively quickly.”

Shaan Raithatha,
Vanguard Senior Economist

Sources: Vanguard calculations, based on data from the European Central Bank and the Federal Reserve Bank of St. Louis FRED database, as of October 31, 2023.

United Kingdom

Our outlook for year-end 2024

0.7%

Economic growth,
year-over-year

After modest contractions in the third and fourth quarters of 2023, the U.K. economy has emerged from its brief recession, recent data show. Real incomes have risen gradually, financial conditions have loosened, and economic activity in the euro area has improved.

2.8%

Core inflation, year-over-year

A reduction in the maximum price that energy suppliers can charge for a unit of energy in the April–June period following recent declines in wholesale energy prices should support falling headline inflation. We foresee headline inflation dropping to just above 2% by year-end.

4.75%

Monetary policy rate

Amid more hawkish global monetary policy developments, we have dialed down our expectations for the depth of cuts this year. We anticipate a quarterly cadence of monetary policy easing, translating to two total cuts in 2024 and four in 2025.

4%–4.5%

Unemployment rate

Soft factors such as reduced vacancies and fewer hours worked, rather than an increase in unemployment, are driving the labor market‘s gradual loosening.