After becoming positive again in August 2024, the private sector credit impulse in the Eurozone continued to recover in September, hitting its highest level in nearly two years (November 2022). Among other factors, it contributed to the pleasant surprise in terms of the development of Eurozone GDP in the third quarter (+0.4% q/q after +0.3% in the first and +0.2% in the second). Credit impulse to non-financial corporations has recovered more quickly since dipping below credit impulse to households in autumn 2023, when the restrictive effects of monetary policy peaked. The impulse of lending to households remained slightly negative in September.
The gradual improvement in household confidence indices in the Eurozone (financial situation and purchase intentions), supported by falling inflation, is still not leading to a rebound in consumption. Retail sales have been stable for a year, even though a slight rise of 0.2% m/m was recorded in August. Motor vehicle sales, which often display a significant change from one month to the next, rose by 8.2% m/m in September, but were down to their lowest level in three years on a three-month moving average basis.
The business climate in Germany (PMI and IFO surveys) deteriorated steadily from its peak in May to September. The relative optimism of the spring has ebbed away, as illustrated in particular by the deterioration in the PMI for export conditions (standing at 49.8 in September, compared to 51.9 in May). As a result, while our forecast for Q3 growth remains at 0.1% q/q, the German government has highlighted the risk of another negative figure (following the rate of -0.1% q/q in Q2 already) and therefore of a recession. Overall, GDP is likely to be close to its level recorded at the end of 2021 (i.e. three years of stagnation).
The Olympic Games were a brief positive interlude, which has now come to an end, as shown by the services PMI, which peaked at 55 in August in the midst of much more lacklustre performances. However, this Olympic Games effect should have buoyed growth in Q3 (0.4% q/q, according to our scenario). Our nowcast is a little lower (0.3%) and highlights the risk that, excluding the Olympic Games effect (estimated at 0.2% by INSEE), the French economy slowed in Q3 (after 0.2% q/q growth in Q2). It is likely to slow further in Q4, judging by the recent deterioration in the services sector (PMI at 48.3 in October after 49.6 in September) and in industry (production PMI down from 44 to 42.5).
Weakness in manufacturing activity is still one of the black spots in the Italian economic situation. Industrial production remained on a negative trend in August (-0.1% 3m/3m), and purchasing managers in the manufacturing sector continued to indicate a deterioration in activity in September (manufacturing PMI at 48.3; -1.1 points over one month), mainly due to falling demand (with the new orders component down 3.1 points, standing at 45.7).
Business sentiment continued to improve in September. The PMI recorded its tenth consecutive month of growth (56.3; +2.7 points over one month). It was driven by a dynamic services sector (57.0; +2.4 points), buoyed by continued strong tourism activity (+11.2% y/y YTD in tourist arrivals), and by a recovery in manufacturing activity (53.0; +2.5 points). Although industrial production continued to decline in August (-0.2% 3m/3m), the outlook appears more favourable, judging by the rise in business leaders' expectations for their production over the coming months (11.4; +6.2 points, according to the European Commission's economic sentiment survey).
Discussions on the 2025 draft finance law (PLF) have just begun in the French National Assembly. The backdrop for this PLF must be outlined. France is setting out to consolidate its budget, which is a major yet necessary task. However, things are hanging in the balance due to power struggles in the National Assembly. Over the past few years, a high fiscal deficit has been run up, with the 2024 fiscal deficit and interest burden (which is expected to increase by nearly 1 point of GDP by 2027) leaving the French government with no choice but to take action. In order to stabilise its public debt ratio, France will have to bring its fiscal deficit below 3% of GDP and therefore reduce it each year for at least five years
Would you rather find yourself barreling down towards a cliff edge, or mis-stepping onto a slippery slope? The answer seems obvious. The former predicament typically ends with multiple traumas, the latter with bruises at worst, albeit ultimately it also leads to the bottom if one keeps going. European policymakers have shown a knack for U-turning at cliff edges; they now need to learn to get off slippery slopes. It may prove even harder.
Germany and France follow different trajectories in terms of fiscal consolidation. The latter is more involved in Germany, where debt is more moderate. However, this is accompanied by a reduced support for the greening of the economy and a GDP stagnation over the last two years. In France, where public debt is higher, maintaining strong fiscal support has been accompanied by an increase in savings. The literature points out that, in this context, fiscal consolidation based on lower spending could support growth.
The Italian real GDP over the past three years is higher than previously estimated, thanks to the 2024 general revision of the national accounts. This revision, which is undertaken every five years and was published by the Italian National Institute of Statistics (Istat) on 23 September, includes the basis change with reference year 2021. As a result, real GDP is finally, albeit only slightly, above the level posted before the 2008 financial crisis (0.6 pp higher in Q2 2024 than in Q4 2007).
Growth in the Eurozone is expected to stabilise at 0.3% q/q in the second half of 2024, before picking up slightly in 2025, supported by the cycle of interest rate cuts. However, the difficulties in industry, highlighted by the deterioration in PMI indices in September, and the uncertainty about the Chinese economy, increase the downside risks to our forecasts. A more adverse scenario, in which the manufacturing sector drags the rest of the economy along with it, is not the preferred one at the time of writing. Although less pronounced, the differences in dynamism between countries and sectors are expected to continue into 2025.
While there were signs of a rebound in German growth at the beginning of the year, the industrial recession was back from Q2 24, with a negative impact on the labour market that is now noticeable as the unemployment rate is rising. Against this backdrop and following the withdrawal of support for the purchase of electric vehicles in December 2023, households have increased their level of savings. However, there are still modest signs of a rebound, with a slight increase in demand. At the same time, the government’s awareness of the stalling of German industry could lead to the return of support measures.
Inflation and rising interest rates have resulted in the landing of domestic demand in the private sector overall (households and companies), without preventing French growth from maintaining a moderate pace (1.1% in 2023, 1.2% in 2024 according to our estimates), as a result of a drop in imports and therefore a positive contribution from net exports. Growth was also driven by service output (investment by companies in information and communications is even expected to overtake construction soon). This support is expected to drive stable overall growth in 2025, at 1.2%.
The recovery of the Italian economy continues, although at a moderate pace. In Q2 2024, real GDP rose by 0.2% q/q, supported by domestic demand, while net exports’ contribution was negative. The slowdown of investment reflected the decline of expenditure on dwellings, while machinery investment increased. Consumption moderately increased. Value added slightly accelerated in the services sector while continuing to contract in the manufacturing sector. The labour market has shown significant improvement since Q2 2021. In Q2 2024, the employment rate rose to 62.2%, a historical peak that, nevertheless, remains low in comparison with the main EU partners.
For the fourth year in a row, Spain will be the primary growth driver in the Eurozone. This country’s outperformance is expected to continue over the remainder of 2024, albeit with very slightly less momentum than in H1 (expected growth of +0.6% and +0.7% q/q in Q3 and Q4 after +0.9% and 0.8% in Q1 and Q2). Foreign trade, mainly driven by the still significant growth in exports of tourism services, should continue to support activity. For its part, the marked fall in inflation (+2.4% y/y in August; -1.2 pp over two months), combined with the strength of the labour market, should allow private consumption to gradually recover.
The Dutch economy avoided falling back into recession in the second quarter, thanks to a much smaller annual drop in exports and solid public spending, which was a promise from the new government. However, inflation is stronger than expected and will need to be monitored, as it could become a drag on private consumption. The outlook remains fine, nevertheless, but investments need to recover further in order to compensate for persisting labour shortages.
Our nowcast for the ongoing third quarter has Belgian growth at slightly below trend. Household consumption hasn’t accelerated much, while typical-election year dynamics inflate government spending. Gross fixed capital formation, dominated by firm investment, remains positive but the underlying trend is worrying. Belgian manufacturers seem especially far from a return to normal, while the spectre of fiscal tightening looms.
In a previous article, we discussed the major challenge for the European Union (EU): to accelerate its ecological transition while dealing with the consequences of the ageing of its population. It so happens that the stakes have just been clarified in the Draghi report on the future of European competitiveness. In order to preserve their social model or not stall in the face of Chinese and American competition, the EU 27 countries should increase their productive investment by at least EUR 800 billion per year, which entails an unprecedented effort (equivalent to 4.7 GDP points, i.e., at least two Marshall Plans)
In September, the U.S. Federal Reserve at last followed suit with the ECB and the Bank of England and cut its policy rates for the first time since March 2020. But the Fed marked its difference, favoring a significant 50-basis-point cut instead of a more gradual 25. At least on that point, the suspense is over. But the rest of the story has yet to be written.
In order to achieve its climate targets, the European Union will not only have to green its electricity production, but also increase it. This is a daunting industrial and financial challenge, echoed in the “Draghi” report on the future of European competitiveness, as well as the new Green Deal proposed by the re-elected President of the European Commission, Ursula Von Der Leyen.
The outstanding amount of loans to households for house purchase fell year-on-year by 0.65% in July 2024. It stood at EUR 1,424 billion, compared to EUR 1,433 billion at its record high in July 2023. This fourth consecutive decline is particularly remarkable, given that the first (-0.06% in April 2024) was already unprecedented for this series of data, which has been recorded since April 1994.
The household savings rate in France has risen further, up from 17.6% of households' gross disposable income (GDI) in Q1 2024 to 17.9% in Q2 2024, according to the INSEE, i.e. 1 point more in a year. This is also an early sign of an upward trend underway in the Eurozone. While the figures for Q2 are not yet available, the Q1 figures pointed to a savings rate 3 points higher than its pre-COVID level (at 15.4%).
In 2019, the European Union (EU) adopted a very ambitious Green Deal, setting a 2050 climate neutrality target for the 27 member states. Since then, the Fit for 55 legislative package (in 2021) has been introduced, followed by the series of REPowerEU directives (in 2023) detailing the process to speed up reducing greenhouse-gas emissions (to at least twice the current pace). The main focus has been on developing renewable energies, whose share is set to double within six years, accounting for 42.5% of end-energy use by 2030.
Historical relationships between economic data play a key role in shaping expectations. In the US, the Sahm rule is such an important stylised fact: when the recent increase in the unemployment rate reaches a certain threshold, a recession tends to follow shortly or has even already begun. The jobs report published early August showed that this critical value had been reached, triggering a drop in investor sentiment. At the Jackson Hole conference, Jerome Powell explained that the Fed’s focus is shifting to the labour market and brought an unambiguous message that the rate cutting cycle is to start in September
In August 2024, French inflation is expected to fall back below 2% year-on-year for the first time in three years (August 2021). This disinflation is mainly linked to energy prices and is expected to increase further at the start of 2025 for the same reasons (expected drop in electricity prices). By contrast, inflation in services, which has been impacted by an Olympic effect in particular, is expected to remain high in the short term, but will not prevent further disinflation.
