Global credit rating agency S&P said in its latest economic outlook that weak productivity and uncertainty over high labor costs could set back economic output in the euro zone.
advertisementThe eurozone faces a weaker-than-expected growth outlook over the next two years, and inflation may recede as quickly as many expect, resulting in fewer European Central Bank (ECB) interest rate cuts. The latest economic forecasts by World Credit Ratings agency S&P suggest that it may be possible.
Regional GDP growth is expected to be 0.7% this year, slightly lower than S&P Global Ratings' previous forecast of 0.8%.
It is questionable whether the recovery in growth will be strong beyond 2024, in part due to shockingly low productivity, which affects economic output, employment and wages.
Sylvain Breuer, S&P's chief EMEA economist, told Euronews Business: “Europe's economy is on a modest trajectory of improving activity and job growth, but productivity remains below long-term trends. I also know that there are many Productivity has been virtually flat for years, which is very worrying.
Meanwhile, implementation of the Next Generation EU Recovery Plan, which aims to accelerate the green and digital transition through public investment and reforms, is far behind schedule. This means that a large amount of public spending is being taken out of the euro area economy.
There is a shortfall of 127 billion euros, equivalent to 0.7% of EU GDP in 2023, of projects not completed by the deadline of the third quarter of 2023, which have yet to be spent and boost the economy.
“Stagnation in productivity and delays in the implementation of Next Generation EU have led us to revise downward our forecasts for a growth recovery in 2025 and 2026.”
The agency's latest forecast for eurozone GDP calls for GDP growth of 1.3% in 2025 and 2026, instead of the previously expected 1.5% and 1.4%, respectively.
ECB is in the process of cutting interest rates with inflation risks
Credit rating agencies have downgraded their ratings, seeing that the current consumer price growth is surprisingly low. inflation forecast In 2024, it will rise from 2.9% to 2.6%.
But in the longer term, high wage growth, currently around 4%, combined with weak productivity, risks pushing up inflation, which could also be affected by international trade in the Red Sea.
However, in addition to the slump in productivity and the development of international trade, the wage growth rate is expected to remain high, so the expected inflation rate is expected to increase from 2.0% to 2.1% in 2025 and from 1.7% to 1.9% in 2026. It is rising slightly.
Breuer said the ECB plans to cut interest rates three times in 2024, starting in June. In 2025, ECB may reduce rate cuts The deposit facility interest rate, currently 4%, is expected to reach 2.5% by the end of 2025, with just three fewer deals than previously expected.
Germany's economy is emerging from recession
Europe's largest economy is slowly emerging from recession, with GDP growth expected to be 0.3% this year, the report said.
Breuer said there was growing data showing that Germany's manufacturing industry had emerged from the contractionary period at the beginning of the year, and there were encouraging signs that production was picking up in the chemicals sector, for example.
“For Germany, the short-term recovery is not the issue. The recovery is underway. It's really the medium-term outlook that matters,” he said, warning that the country's working population was rapidly shrinking.
Not only Germany, but all of Germany faces this challenge. The report, which cited figures from the United Nations Department of Economic and Social Affairs, said the decline in the working-age population is likely to reduce GDP growth by 0.5 to 0.6 percent per year over the next five years. But in Europe, Breuer added, immigration after the Ukraine war could reverse this effect to some extent.
“Another question concerns the competitiveness of the German economy after this major energy price shock, and also in the context of China, which is challenging Germany more than ever,” Breuer said. “China is in direct competition in the automotive and chemical sectors.”
Big risks ahead for the euro area economy
Geopolitics will play a significant role in the bloc's outlook over the next 12 to 18 months. “We have two regional conflicts, a never-ending situation that is shaking the continent, important elections coming up this year, and both the United States and Europe potentially changing trade,” Breuer said. He also pointed out, adding that the European economy: Like the German economy, it is highly dependent on trade.
advertisementAnother significant risk is related to inflation. “Inflation may not recede as much as we think, especially if productivity cannot keep up with wage growth,” the chief economist added.
Productivity in Europe is slumping against the backdrop of large capital investments, and uncertainty is rising.
“It partially explains why productivity is weak in the euro area, but it can only partially explain it,” he said. Against the backdrop of this manufacturing recession, the manufacturing industry has begun to reduce its workforce, while productivity is being suppressed due to factors such as an increase in employment in the low-productivity service industry.
The working-age population is shrinking and people are taking more sick leave than before the pandemic, “which is weighing on productivity,” Breuer said.
“However, almost 40% of this decline is still unexplained.”
advertisementThere are also potential risks to the European labor market, with unemployment rates potentially rising more than expected.
“The question is no longer whether unemployment will rise this year, but by how much,” the report said, citing high labor costs, fewer vacancies and a lack of significant employment growth. said.
S&P Global Ratings expects the euro zone unemployment rate to be 6.7% at the end of this year, up from the current 6.4%.
