Disinflation in the euro zone continues to buoy household confidence. The European Commission index rose by 0.6 points to 14.9 points in March, according to the flash estimate. This is its highest level since February 2022 and the start of the war in Ukraine. Our Nowcast currently indicates a 0.3% q/q recovery in activity in the first quarter of 2024, a result that points to a risk that our forecast of +0.1% q/q will increase.
Inflation in the euro zone fell again in February, from 2.8% to 2.6% y/y. The fall is attributable to the decline in inflation in food (-2.1 pp to 3.3% y/y) as well as in manufactured goods (-0.4 pp to 1.6% y/y), while energy price deflation faded (+2.5 pp to -3.7%) and inflation in services stabilised at 4.0. It should be noted that no economies in the euro zone are showing inflation above 5.0%. Estonia – the last country in this case – fell below this threshold again in February.
However, the difficulties in the manufacturing sector remain significant and constitute the most notable downside risk for activity in the euro zone in the short term. Industrial production fell 3.2% m/m in January, to its lowest level since September 2020. The outlook for the sector remains unfavourable: the PMI index fell in March for the second consecutive month (-0.8 points to 45.8) and dropped significantly below the expansion threshold of the 50s. The sub-index on employment in the sector fell by 0.5 points to 46.6, its lowest level since August 2020. The S&P Global report thus points to a continued turnaround in job creation in this sector, a phenomenon that has already been ongoing since last year, albeit to a limited extent. Indeed, according to Eurostat figures, manufacturing employment in the euro zone peaked in the second and third quarters of 2023, before falling by 0.1% q/q in the last quarter. The share of manufacturing employment in the euro zone thus reached its lowest level ever, at 12.8%.
However, this decline remains offset by the creation of jobs in services, in particular information and communication (+0.6% q/q in Q4 2023), public service (+0.4% q/q), as well as in construction, which is rallying somewhat (+0.4% q/q). This is enabling the labour market in the euro zone to remain very tight. The unemployment rate reached its lowest level ever in January, at 6.4%. Our growth forecast for 2024 remains that of gradual strengthening in activity, which, despite zero carryover, would bring growth to 0.7% on an annual average, which is slightly better compared to 2023 (+0.5%).
Article completed on 26/03/2024
