The eurozone economy shows signs of weak recovery and has limited growth momentum

The recent release of economic data in the eurozone has improved, sending a positive signal of economic recovery. The agency expects that the eurozone economy is expected to perform better than expected this year and get rid of zero growth as Germany, the largest economy in the euro area, may come out of the economic stagnation that has lasted for more than a year. However, the current economic growth rate is relatively slow, the overall growth momentum is still limited, and the economic recovery of the euro area still faces a series of challenges.

Economic performance improves market sentiment

According to a survey released by Bloomberg on May 13, Germany, the largest economy in the eurozone, may get rid of more than a year of near-stagnation, and the eurozone economy will grow faster than previously expected this year.

Analysts surveyed expect output in the EU to grow by 0.7% in 2024, up from 0.5% forecast in the last monthly survey; Germany's gross domestic product (GDP), known as the "locomotive of the European economy", is expected to grow by 0.2%, up from the previous forecast of 0.1%.

Investor confidence in the German economy has been growing, although the data is only now reflecting this, analysts at CMC Markets said in a research note. It is hoped that the growth of the economies of the major trading partners will also be good for the German economy.

The report also raised the economic forecasts for France, Italy and Spain from 0.7%, 0.6% and 1.7% to 0.8%, 0.8% and 2% respectively.

Eurostat's latest data showed that the eurozone and EU GDP grew by 0.3% quarter-on-quarter in the first quarter of this year, 0.4% and 0.5% year-on-year, respectively, as inflationary pressures on consumers eased, both better than the economic performance in the fourth quarter of last year.

In addition, data released on 7 May showed that retail sales in the Eurozone rose 0.8% in March from the previous month, slightly higher than economists' expectations, reversing the downward trend in February.

On 6 May, the Eurozone released the services PMI for April, which significantly exceeded market expectations and recovered to the second highest level in nearly a year. The Eurozone Sentix Investor Confidence Index rose to -3.6 in May from -5.9 in April, the highest level since February 2022 and above analysts' estimates of -5.0. Sentix said that despite the small pace, the trend is moving in the right direction and the data is encouraging.

Analysts point out that as inflation gradually cools, the eurozone economy is returning to growth faster than expected. The economic outlook is expected to improve further this year, driven by expectations of an interest rate cut by the European Central Bank.

Jean Paul, senior economist at ABN AMRO, said the eurozone grew 0.3% quarter-on-quarter in the first quarter, beating market expectations of 0.1%, ending five consecutive quarters of stagnant growth, with signs of improvement likely driven by net exports, services consumption and a more active construction sector in the mild winter.

European Central Bank President Christine Lagarde also said a few days ago that she has seen obvious signs of economic recovery in the euro area.

However, Bert Clarian, senior economist for the euro zone at ING, said that the European economy has not seen a strong rebound due to weak global demand and high interest rates.

Société Générale expects growth in the eurozone to remain modest this year, calling it "resilient stagnation", and expects a slightly better trajectory this year than last year.

The steady decline in inflation has pushed forward expectations for interest rate hikes

The eurozone has also made progress in fighting inflation, more so than in economies such as the United States.

Eurozone inflation came in at 2.4% on an annualized basis in April, unchanged from March and down from 2.6% in February, Eurostat data showed. Core inflation, which excludes energy, food, alcohol and tobacco prices, was 2.7% in April, down from 2.9% in March, indicating that core inflation is continuing to fall.

Inflationary pressures in the eurozone have eased, providing room for the ECB to cut interest rates. As June approaches, the ECB's choice in terms of monetary policy adjustment is increasingly the focus of market attention.

The head of the Bank of France, François Villeroy de Gallo, believes that the data has boosted confidence and inflation is moving towards the ECB's 2% target. "So we should be able to start cutting rates in early June," he said. ”

On 10 May, the ECB released the minutes of its April monetary policy meeting, which showed that some officials believed that if wage and inflation data remain at their current relatively modest levels, "the next move will be to cut interest rates, most likely on June 6 (the time of the ECB's monetary policy meeting)".

Analysts at BNP Paribas pointed out that at present, the money market is pricing in a probability of a rate cut in June close to 70%, reflecting the consensus of many policymakers to prevent an excessive slowdown in the economy.

However, economists warn of the possible negative impact of the divergence in monetary policy between Europe and the United States. Daniel Lacalle, chief economist at the investment agency Tressis Gestion, believes that if the ECB cuts interest rates earlier than the Fed, it is actually sending a signal to the world that the euro needs to depreciate. This could adversely affect Eurozone imports.

But International Monetary Fund (IMF) Managing Director Georgieva said the IMF's analysis showed that a 50 basis point interest rate differential between the Fed and the ECB could lead to only minor fluctuations in the exchange rate.

The economic outlook remains challenging

The eurozone economy showed a weak recovery at the beginning of 2024, but the economic growth rate in the first quarter was slower, reflecting that the growth momentum is very limited, and the economic recovery still faces a series of challenges.

The European Commission recently released the Eurozone economic sentiment index for April, which fell slightly by 0.6 points month-on-month to 95.6, worse than the market expectation of 96.7, and the industrial and service sector sentiment index both fell, with the industrial decline being particularly significant, and the prosperity index fell further to -10.5 from the previous value of -8.8. The economic sentiment index came in lower than expected and the previous reading, indicating that business and consumer confidence in the economic outlook has weakened, and the eurozone is not fully out of economic difficulties.

From the perspective of the external environment, uncertainties such as the ongoing Russia-Ukraine conflict, the turmoil in the Middle East, and the direction of the Fed's monetary policy may put pressure on the eurozone economy. At the internal level, the recovery has also been hampered to some extent by the rigidity of the labor market, slow productivity growth and high debt levels in member states.

At the recent special summit of the European Union, the competitiveness of the EU became the focus of attention of all parties. European Council President Charles Michel said the EU faces "extremely difficult challenges" internationally and that promoting competitiveness is important to maintain the EU's prosperity. The EU has a long way to go to eliminate the pain points, and the few substantive results of this summit also confirm this.

The communiqué issued by the summit stressed the need for a new agreement on European competitiveness based on a fully integrated single market, calling for "decisive and swift" progress in key areas conducive to competitiveness, including capital markets unions. However, in the face of large and complex reforms, there are huge differences in positions among Member States. (Reporter Zhou Wuying)

Source: Economic Information Daily