Inflation in the euro zone revised downwards for 2024… just like growth

2024-02-15 12:26:00

The European Commission is revising its 2024 outlook downwards. According to its latest estimate, published this Thursday, inflation in the euro zone will be lower than expected this year, at 2.7%, compared to 3.2% anticipated so far.

« The fall in energy commodity prices and the slowdown in economic dynamics have placed inflation on a more pronounced downward trajectory than expected », explained the Commission.

The increase in key rates, from 0% at the start of 2022 to 4.25 and 4.75% today, is also partly behind the drop in inflation, since it has made it more expensive and difficult access to credit and, ultimately, to consumption.

The other side of the coin of inflation and the rise in rates, the European Commission significantly revised downwards on Thursday its growth forecast for the euro zone in 2024 to 0.8%, against 1.2% anticipated so far , after a ” weak ” beginning of the year. And this, while « the European economy leaves behind an extremely difficult year », recognized the European Commissioner for the Economy Paolo Gentiloni.

Inflation and rising rates are weighing down the European economy

« After a narrowly avoided technical recession » in the second half of 2023, the outlook for the European economy « remain weak ” in the first quarter, estimates the Commission which nevertheless expects a ” gradual acceleration » later this year. As a reminder, the gross domestic product (GDP) of the euro zone only increased by 0.5% over the whole of 2023 compared to the previous year. And this zone recorded zero growth in the last quarter, quarter-on-quarter, after a decline of 0.1% over the period from July to September.

Growth in the euro zone: Spain and Portugal are in the lead, Germany is losing ground

After a weak start to the year, “ the expected rebound in 2024 should be more modest than expected three months ago, but gradually accelerate thanks to the slowdown in price increases, the increase in real wages and the remarkable strength of the labor market “said Paolo Gentiloni.

« However, the global landscape remains very uncertain », Qualified Trade Commissioner Valdis Dombrovskis. “ We are closely monitoring geopolitical tensions, which could have a negative impact on growth and inflation “, he warned. These forecasts are “ surrounded by uncertainties » linked in particular to the risk of extension of the conflict in the Middle East.

Attacks on ships in the Red Sea are forcing shipowners to take longer routes to transport goods. Some fear a surge in oil and gas prices which could cause inflation to pick up again and further hamper European growth. « Rising shipping costs following Red Sea trade disruptions expected to have only marginal impact on inflation », tempers the Commission. “ However, further disruptions could lead to further supply bottlenecks, which could stifle production and drive up prices “, she warns.

Towards a rate cut in 2024?

With this alignment of falling inflation, which has however not reached the ECB’s 2% objective, and falling activity, the guardian of the euro could decide to lower its key rates soon.

Inflation in the euro zone: the three hot spots that the ECB will monitor in 2024

“Disinflation should restore purchasing power to households, while paving the way for an easing of monetary policy. The debate on rate cuts is finally open at the ECB and we can think that it will be decided by mid-year. explained ODDO BHF chief economist Bruno Cavalier in a recent note.

At the end of January, a week after her monthly meeting where she decided to keep her rates unchanged, Christine Lagarde, the president of the ECB assured on the American channel CNN that the next change in rates would be a reduction. “There may be several pauses but the next move will be downward”she declared, specifying that the members of the Governing Council of the European Central Bank (ECB) were on the same line “ If we have the choice between increasing and reducing, it will be to reduce theme,” she added.

Caution remains in order

The financial markets are currently counting on a drop from the spring which could revitalize demand for credit and therefore consumption and investment. But the Frankfurt institution wants to be cautious about announcing a date. « We are on a disinflationary trend, there is no doubt about it. But we need to be further along in the process to have confidence », Estimated Christine Lagarde during the last meeting of the ECB.

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The evolution of wages in Europe is particularly observed by central bankers to determine the evolution of monetary policy. During the last meeting of governors in Frankfurt, the ECB insisted that the growth of wages would be the most important factor in deciding whether or not to cut rates.

Core inflation is also a closely watched indicator by euro zone central banks. On the Old Continent, inflation, excluding energy and food prices, is expected to stand at 2.7% in 2024 and 2.1% in 2025, compared to 5% in 2023, according to the Eurosystem. . However, these forecasts depend greatly on the economic situation. A new shock could cause the general price index to jump.