Growth in the eurozone will be slower than previously expected as the bloc continues to struggle with inflationary pressures and high interest rates, according to new forecasts from the European Commission.
The eurozone is now predicted to grow 0.8 per cent in 2024, downgraded from 1.2 per cent in its previous round of forecasts in November. However, this is still an improvement on the 0.5 per cent rise in 2023.
Its post-pandemic rebound came to “an abrupt end” last year in the face of the European Central Bank’s rapid rise in interest rates and collapsing household spending power.
The Commission noted that the eurozone “entered 2024 on a weak footing than previously expected”.
“After narrowly avoiding a technical recession in the second half of last year, prospects for the first quarter of 2024 remain subdued,” it said.
In 2023, the eurozone grew 0.5 per cent, a far cry from the 3.1 per cent expansion seen in the US over the same period. The bloc stagnated in the final quarter of the year.
Analysts have warned that it will struggle to generate any momentum in the early parts of the year due to the continued impact of the ECB’s rate hikes. The main interest rate stands at its highest level in 22 years and Christine Lagarde has warned that it is still “premature” to discuss cutting rates.
However, the Commission noted positive trends when it came to inflation. Plunging energy prices have been followed by a “broad-based” moderation in price pressures, the Commission said.
Oil and gas futures are now significantly lower than in its Autumn forecast, meaning inflation is now expected to average 2.7 per cent across 2024. This was down from a previous estimate of 3.2 per cent in November and 6.3 per cent the year before.
The fall in inflation over the coming year would come despite “mild upward pressure” from higher shipping costs.
Risks were weighted to the downside, however. “Additional trade disruptions could bring renewed stress to supply chains, hampering production and adding price pressures,” the Commission warned.
On the demand side, a faster recovery of consumption and higher-than-expected wage growth could lead to an increase in inflation.