Our economic outlook for the euro area
June 25, 2024
Our outlook for year-end 2024
0.8%
Economic growth,
year over year
The euro area economy grew by 0.3% in the first quarter, leaving behind five quarters of stagnation. We foresee continued growth driven by robust rises in real household incomes and a fading credit drag. Still, restrictive monetary and fiscal policy and the lingering effects of the European energy crisis will limit activity. Surveys point to continued struggles in the manufacturing sector.
2.2%
Core inflation, year over year
Energy, food, and core goods inflation are tracking at levels consistent with the 2% inflation target set by the European Central Bank (ECB). Services inflation has remained sticky. Though we remain confident that services price increases will slow to target-consistent levels by year-end, the balance of risks skew to the upside. In our baseline view, core inflation falls to 2% in February 2025.
3.25%
Monetary policy rate
The ECB lowered its deposit facility rate to 3.75% at its June 6 meeting after holding it at a cycle high of 4% for nine months. We expect a quarterly cadence for future quarter-point cuts, leaving the policy rate at 2.25% at the end of 2025. However, risks skew toward less easing given a recent rise in sequential services inflation and stronger growth.
6.5%
Unemployment rate
We believe that the labor market is softer than suggested by the unemployment rate, which is hovering near record lows. Job vacancy rates have receded, labor hoarding remains elevated, and the number of hours worked has stagnated. We expect the unemployment rate to stay close to 6.5% for the rest of this year and next.
What I’m watching
After five quarters of stagnation, a modest return to growth
The euro area returned to growth in the first quarter of 2024, thanks mainly to higher exports. The growth outlook is an important factor driving underlying inflation trends and will be a key input into monetary policymaking. We expect quarterly growth rates of 0.3%–0.4% (nonannualized) for the rest of the year, which would leave euro area growth at 0.8% for 2024 as a whole.
Shaan Raithatha,
Vanguard Senior Economist
Sources: Vanguard calculations using data from Eurostat as of June 7, 2024.
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