Eurozone GDP growth is expected to rise to 1.4% next year from 0.7% this year, according to S&P Global Ratings, which sees a turnaround in the region's economy. The upward revision from a 1.3% forecast in March reflects the effects of trade rebalancing, continued deflation and lower energy prices that have helped real incomes recover.
Eurozone GDP growth is forecast to rise to 1.4% next year from 0.7% this year on lower energy prices and improved terms of trade. S&P Global Ratings expects ECB interest rates to fall quarterly and inflation to reach 2% by mid-2025. Eurozone unemployment is forecast at 6.5% this year and next.
Supported by a recovery in productivity, easing profit margins and slowing wage growth, S&P projects the euro area is on track to meet the European Central Bank's (ECB) 2% inflation target by mid-2025. Inflation is expected to fall to 2.2% in 2025, from 2.4% this year and 5.4% in 2023. Previous forecasts had estimated 2.6% in 2025 and 2.1% in 2024.
As growth returns to potential over the next 12 months and inflation moves towards its target, S&P expects the ECB interest rate to be reduced quarterly, from the current 3.75% to 2.5% by the third quarter of 2025. This gradual easing would suggest that monetary policy will no longer be tight, but will still not be expansionary.
The unemployment rate forecast for this year and next was revised to 6.5%, a slight improvement from the previous forecast of 6.6%, due to the continued resilience of the labor market.
After experiencing semi-stagnation and a slight contraction at the end of 2023, Eurozone GDP rose by 0.3% in the first quarter of 2024, driven by net exports and private consumption. The recovery is mainly due to improving terms of trade following lower energy prices, which have led to easing inflation, lower lending rates and improving consumer and business confidence.
Wages are expected to grow faster than consumer prices in the first quarter of 2024, supporting a continued recovery in household purchasing power. Job vacancies have peaked but remain at a sufficient level to prevent the unemployment rate from rising. Germany in particular is expected to see the full benefits of lower gasoline prices by the end of the year, strengthening domestic demand through consumer spending and investment.
Germany emerged from recession in early 2024 thanks to a recovery in its energy-intensive sector, but overall growth still lags other major European countries. Meanwhile, Spain's GDP growth accelerated for the third consecutive quarter, continuing to beat expectations. Industrial production and consumer spending are the major growth drivers in Spain, supported by government policies and labor market reforms.
Despite the brightening outlook, inflation picked up slightly in May 2024 due to base effects from government support on domestic energy prices, suggesting that the 2% target will take time to reach. A recovery in wage growth and productivity will be key factors in further containing inflation. We therefore expect the ECB to proceed with rate cuts cautiously, in line with actual wage data and staff forecasts, for a cumulative 125 basis points of cuts by the third quarter of 2025.
Several risks could impact this positive outlook, including geopolitical conflicts in the Middle East and Ukraine, decoupling of monetary policy between the Eurozone and the United States, political uncertainty in Europe, and strained economic relations with China. These factors make the ECB's interest rate forecasts particularly uncertain and may require adjustments as financial conditions change.
Fibre2Fashion News Desk (DP)
