With zero growth in the last quarter of 2023, the Eurozone has narrowly escaped recession, but economic activity is still hanging by a thread. Over 2023 as a whole, the increase in real GDP just reached 0.5%, and the carry-over effect for 2024 is null, as a result of a second half that was even weaker than the first one. Nevertheless, our Nowcast currently indicates growth of 0.3% q/q in Q1 2024, which is higher than our December forecast.
Inflation fell again in January, from 2.9% to 2.8% y/y. Disparities between Member States are narrowing, with no country now reporting a rate of above 5%. The year-on-year increase in negotiated wages in the Eurozone in Q4 2023 slightly slowed (from 4.7% in Q3 to 4.5%), dispelling fears of rising inflationary pressures. Against this backdrop, we are not altering our forecast of an initial key rate cut by the ECB in April. Nevertheless, the flash estimate for Eurozone inflation in February, published on 1 March, surprisingly rose to 2.6%, which could mean that a little more consideration is given to postponing this first policy rate cut.
The composite PMI has been rising, albeit modestly, since October, although it remained in contraction territory in February, at 48.9. After a strong recovery, consumer confidence has plateaued in the last few months, with the rise in the indicator related to the financial situation being offset by the deterioration in the economic situation index. Consumer outlook on labour market developments improved slightly in February and remains rather positive. The labour market has been very resilient thus far, with the unemployment rate remaining at an all-time low in December, at 6.5%.
The European Commission survey for February reveals some areas of concern, including a further deterioration in employment prospects in the manufacturing and construction sectors. The construction sector is suffering twofold as a result of the downturn in residential and commercial activity caused by, in particular, rising interest rates. In addition, the Eurozone construction PMI is corroborating the data from the European Commission indices, falling 2.3 points to 41.3 in January. If we exclude the pandemic period, this is the lowest level seen since the end of the 2011-2013 crisis in the Eurozone.
Despite the significant downside risks, 2024 should see a gradual recovery in the Eurozone, buoyed by falling inflation and interest rates. However, as is often the case, the picture will be contrasted across member states.
Article completed on 29/02/2024
