The first cut in policy rates by the European Central Bank on 6 June came as no surprise, as the committee members had largely prepared the ground ahead of the decision. The timing and scale of future easing is more uncertain, given the continuing strong pressure on wages, high inflation in services, and the resurgence of tensions in global shipping. We expect two further interest rate cuts in 2024, at a pace of one per quarter (September and December).
German growth is expected to be supported, in the short term, by the upturn in the country's industry, which should offset some of the loss of production associated with the rise in the cost of energy following the outbreak of the war in Ukraine. As an open economy, Germany is also expected to benefit from the rebound in growth in the eurozone since the beginning of 2024. However, in the longer term, German growth potential is likely to continue to suffer from labour shortages, from the weight of its industry (weakened by the low-carbon transition), and also from the consequences of insufficient investment against a backdrop of a surge in new competitors.
The French economy is characterised by growth, a statement that is all the clearer following the changeover of the national accounts to the 2020 base and the publication of the 2023 annual accounts, which led INSEE to raise its 2023 GDP estimate by almost EUR 20 billion. However, there are winners and losers from this growth. In 2024, it should be sustained mainly by market services, which account for the bulk of job creation and growth in demand. However, this growth in services substitutes that for goods, while inflation and interest rate shocks continue to weigh on investment.
In Q1 2024, the Italian economy slightly accelerated. Real GDP rose by 0.3%, with a mixed evolution by sector. Valued added of construction rose, while that of manufacturing declined, suffering from the slowdown of exports. Services increased moderately, benefitting from the recovery of tourism. Domestic demand contributed positively to the overall growth and households profited from the improvement of labour market conditions. Economic and financial conditions of firms further improved. In Italy, in the first five months of 2024, on average, the consumer price index increased by less than 1% y/y per month.
The Dutch economy was confronted with a new decline of its GDP in the first quarter of 2024, due to an unexpected drop in exports. The future does not look too gloomy though, since a new coalition was formed and presented friendly purchasing power measures that are likely to support private consumption. The agreement however plans to limit the budget deficit to 2.8% of GDP through spending cuts which could deteriorate the country’s productivity in the longer run.
Belgian economic growth remains close to trend rates, even as a shift in the underlying drivers is taking place. Corporate investment rebounded from last quarter’s one-off dip. More encouraging is the bottoming-out of household investment in dwellings. Real estate prices have remained on an upward trend throughout the ECB’s now ended hiking cycle and the depressed activity levels are expected to slowly recover. Public finances remain a challenge, as the spectre of prolonged government formation talks once again casts a shadow over the Belgian economy.
After being in recession in 2023 (-0.8% on an annual average), due to falling investment, high inflation and the decline in real wages, Austrian growth is expected to remain weak this year (+0.3% according to the European Commission). In Q1, real GDP grew by just 0.2% q/q, still dragged down by the decline in investment (-4.7% q/q, contributing -1.1 pp to growth), but nevertheless pulled up by the rebound in private consumption (+0.8% q/q, contributing +0.4 pp), itself supported by the return of real wage increases and the resilience of the labour market.
The Greek economy is proving resilient to rising funding costs and geopolitical tensions in Europe. The country is expected to post economic growth once again above the eurozone average in 2024. Real GDP grew by 2.0% in 2023 as an annual average and by 0.7% q/q in Q1 2024, driven by private consumption and investment. Except in real estate, inflationary pressures have eased and fuelled purchasing power gains which, with rising employment, are supporting private consumption, the weight of which in GDP reached a new record in Q1 2024 (76.9%). Because of its size and dependence on the external market, the country nevertheless remains very exposed to economic developments in Europe as well as to the energy market, and oil in particular.
The party that wins the general election on 4 July will inherit an economy running out of steam. The scenario of a slowdown in growth in Q2 (+0.2% q/q), and over 2024 as a whole, remains our central forecast. Surveys data (PMI, GfK consumer confidence index) and investment have recovered, but household consumption remains depressed. While disinflation supports purchasing power, rising unemployment and the persistence of high interest and savings rates are limiting its effects. The rise in mortgage payment arrears indicates that the refinancing shock is continuing to spread. The return of inflation to 2% in May will support the Bank of England in its decision to initiate a first cut in key rates in August, according to our forecasts, which will give households (little) breathing space.
In 2023, Denmark experienced dynamic and above-expected economic growth, in the form of an illusion given the preponderance of the pharmaceutical sector. This sector turned into the country’s main asset, to such an extent that fears of increasing dependence have appeared. Furthermore, inflation has fallen significantly since the 2023 high, while the Danish central bank is expected to continue to ease policy in line with the ECB.
Like their number, the economic weight of corporate bankruptcies has increased to an unprecedented extent since March 2022, starting from an all-time low in 2021. This ratio compares the outstanding amount of bank loans to newly bankrupt corporates to the total outstanding amount of bank loans to corporates (in difficulty or not). These developments are mainly due to the continued catch-up of corporate bankruptcies. This concerns more fragile corporates whose would have already gone bankrupt in the absence of the economic and health measures put in place in response to the COVID-19 pandemic. Furthermore, the repayment of State-Guaranteed Loans does not seem to have an excessive impact on the financial situation of the majority of corporates that have benefited from them
GDP growth, inflation, exchange and interest rates.
Key figures for the French economy compared with those of the main European countries, analysis of data on the population and the French labour market, activity by sector, publication administration figures, inflation, credit and interest rates, corporate and household accounts.
GDP growth, inflation, interest and exchange rates.
Economic data for April and May augur a relatively good Q2 in terms of growth, despite some continuing dichotomies.
If there could still be any doubt, Philip Lane's latest statements will, on the face of it, confirm a first cut in the ECB’s policy rates at the next monetary policy meeting on 6 June. The current trend in euro-zone inflation is giving space for the ECB to initiate monetary easing, even though new upward pressure on prices are emerging. Inflation fell marginally in April from 2.43% y/y to 2.37% y/y, while core inflation decreased more sharply from 2.95% y/y to 2.66% y/y. The likely return of a positive contribution from the energy component in May (after twelve months in negative territory), an upward momentum in services prices (the 3m/3m annualised rate rose back above 5%) and annual growth in negotiated wages, which were on the rise once again in Q1 (4
The underperformance of German growth in recent years continued in 2023. However, even though it is no longer a driving force, the German economy is seemingly benefiting from the recovery seen elsewhere in the Eurozone, which could boost its growth in the coming quarters. This was reflected in a relatively good performance (0.2% q/q) in Q1, which, like the Eurozone's performance (0.3% q/q), surprised on the upside. The business climate (IFO) shows an improvement, albeit still partial, with an index of 89.3 in both May and April, making them the best two months since May 2023.
French growth surprised on the upside in Q1, hitting 0.2% q/q as a preliminary estimate, supported by household consumption and business investment in services. Our forecast for Q2 is for more of the same (our nowcast, at 0.3% q/q, even suggests an upside risk), confirming the return to slightly stronger growth, after a second half of 2023 at +0.1% per quarter.
Disinflation is back in Italy. After rising slightly in March (1.2% y/y; +0.4 pp over one month), inflation fell back below the 1% mark in April (0.9% y/y), mainly due to the still significant deflation in the energy component (-12.2% y/y). Although it is falling, inflation in services remains strong (+3.1% y/y; -0.2 pp over one month), keeping core inflation at 2.2%. Nevertheless, disinflationary trends in consumer prices are set to continue, with the evolution of production prices still negative (-9.6% y/y in March).
Unsurprisingly, the Spanish economy remains positive at the start of the second quarter. After outperforming eurozone countries with growth of 0.7% q/q in Q1, activity should stay strong in Q2 (0.5% q/q according to our forecasts).
The still-elevated level of inflation in annual change and its increasing momentum have continued to adversely affect morale in US households. In April, consumer confidence, as measured by the Conference Board, fell for the third month in a row (97.0, -6.1 pp), ultimately cancelling out the progress seen at the end of 2023. Similarly, the University of Michigan survey reported a drop in its Index of Consumer Sentiment in May, with a score of 69.1 (-10.5), the lowest since November.
The preliminary growth estimate for Q1 has not dispelled doubts about the state of domestic demand in the UK. Although inflation has fallen and real wages and household confidence have improved, British consumers are still cautious. Household consumption rose only by 0.2% q/q in Q1, offsetting a small part of the contraction recorded in the previous two quarters (-1.0% cumulatively). In addition, retail sales surprised on the downside in April, falling by 2.3% m/m in volume, following a slight drop in March (-0.1% m/m). Real GDP rose by 0.6% q/q in Q1, underpinned by positive net exports. However, the underlying dynamic was disappointing, as import volumes fell more sharply than exports.
In line with our expectations, the Japanese economy experienced a 0.5% q/q contraction in GDP in Q1 2024. This contraction was likely linked to the disruptions caused by the earthquake on 1 January on the Noto peninsula and the temporary closure of car manufacturing plants amid a safety scandal. GDP components pointed to a broad weakness in the economy with, primarily, a fourth consecutive contraction in household consumption, which was the main driver of the fall. In addition, the release was accompanied by growth in Q4 2023 being revised down to +0.0% q/q (from +0.1% previously). However, activity is expected to rebound in Q2, with our forecasts pointing to a growth rate of +0.8% q/q.
