Our economic outlook for the euro area
July 18, 2024
Our outlook for year-end 2024
0.8%
Economic growth,
year over year
The euro area economy grew by 0.3% in the first quarter, leaving behind five quarters of stagnation. We foresee continued growth driven by robust rises in real household incomes and a fading credit drag. Still, restrictive monetary and fiscal policy and the lingering effects of the European energy crisis will limit activity. Surveys point to continued struggles in the manufacturing sector.
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). However, recent upside surprises in services inflation have led us to raise our year-end forecast for core inflation. Services inflation has remained sticky, at 4.1% year over year the last two months. Though we remain confident that services price increases will slow to target-consistent levels by the first half of 2025, the balance of risks skew to the upside.
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. However, risks skew toward less easing given a recent rise in sequential services inflation.
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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