Eurozone set for weak growth next year, say economists

The eurozone economy is set for only modest growth next year despite wages rising faster than inflation for the first time in three years, according to a Financial Times poll of economists.

Almost two-thirds of the 48 economists surveyed by the FT said they believed the single currency bloc was already in a recession — usually defined as two consecutive quarters of gross domestic product shrinking from the previous quarter.

“We would not describe this as a fully fledged recession; instead we would still characterise this as stagnation,” said Paul Hollingsworth, chief European economist at BNP Paribas. “What’s more, we continue to see a gradual recovery in 2024, rather than further deterioration.”

Most respondents forecast that the current contraction would be shallow and shortlived, with mildly positive growth returning in the first quarter of 2024. However, they expected next year to bring only weak growth and warned that high interest rates, potential energy market turmoil and geopolitical instability could yet cause a deeper downturn.

On average, the economists polled by the FT forecast that the eurozone economy would grow by just over 0.6 per cent next year. Most were more pessimistic than the European Central Bank and the IMF, which have forecast that the bloc’s economy will grow 0.8 per cent and 1.2 per cent next year respectively.

Several economists said the potential election of Donald Trump as US president for the second time and the possibility of Ukraine losing its war against Russia were among the risks that could drag Europe’s single currency bloc into a period of even weaker growth. Vítor Constâncio, former ECB vice-president, said the big risks for Europe were a “recession in Germany or Italy and a Trump victory”.

Holger Schmieding, chief economist at Berenberg, said a Trump victory was the main threat for Europe’s economic outlook. “If the US abandons Ukraine and threatens the EU with a trade war, Europe and the world would suffer more than the US,” he said.

Mahmood Pradhan, head of global macroeconomics at Amundi Asset Management, said the biggest risk for the eurozone was a “prolonged restrictive stance of monetary policy — including a faster pace of balance-sheet unwinding — and less supportive fiscal policy, especially in Germany”.

Two-thirds of those surveyed thought Germany’s economy would return to positive growth next year after it shrank for much of 2023. But Mark Wall, chief European economist at Deutsche Bank, said “significantly tighter fiscal policy in Germany”, after the country’s top court left the government with a €60bn hole in its budget, meant its economy would contract 0.2 per cent.

More than half of economists thought there could still be another energy supply shock next year, even though Europe entered this winter with its natural gas storage tanks almost completely full and oil prices have fallen since the start of Israel’s war against Hamas in Gaza.

“Europe remains supply-constrained when it comes to energy, so any concerns regarding energy supply could see a sharp rise in prices,” said Katharine Neiss, chief European economist at PGIM Fixed Income.

Inflation in the eurozone is expected to fall close to the ECB’s 2 per cent target in less than two years, according to the economists. They forecast that consumer prices would rise on average by just over 2.5 per cent next year and slightly below 2.1 per cent in 2025.

Those forecasts are slightly below those of the ECB, which earlier in December predicted euro area price growth would average 2.7 per cent next year and 2.1 per cent in 2025.

Wage growth is expected to be just under 4 per cent next year in the eurozone, according to the average prediction in the FT poll, which is weaker than the 4.6 per cent forecast by the ECB but would still mean real household income grows for the first time in three years.

Most economists are more gloomy on the outlook for the labour market next year than the ECB. On average, they forecast unemployment would rise from a record eurozone low of 6.5 per cent in October to 6.9 per cent at the end of next year. 

“Beyond political and geopolitical risks, the greatest endogenous threat to the eurozone economy would be a slump in the labour market,” said Sylvain Broyer, chief European Middle East and Africa economist at S&P Global Ratings. “In such a case, the rise in real incomes on which the soft landing script hinges could vanish into thin air.”

Residential house prices will fall a further 1.6 per cent next year, the economists forecast on average, reflecting sluggish growth and significantly higher mortgage rates across Europe. Nearly half of respondents also said they were anxious about a potential crisis brewing in the commercial property sector, while a quarter said this was not a concern.

How did last year’s predictions fare?

Not bad. A year ago Europe was still getting to grips with the energy crisis caused by Russia’s full-scale invasion of Ukraine, which helps explain why most economists polled by the FT were slightly too pessimistic on both growth and inflation.

On average, they forecast the eurozone economy would shrink just under 0.01 per cent this year and inflation would average slightly above 6 per cent. 

Thanks to a swift shift away from a heavy reliance on Russian gas imports to other sources of energy, the bloc has not performed quite as badly as many feared. The ECB forecast this month that growth would be 0.6 per cent and inflation would be 5.4 per cent this year.