by Thomas Moller-Nielsen
The International Monetary Fund (IMF) has downgraded its growth forecast for the eurozone this year, as the continued impact of the energy crisis and weak consumer demand raise growing concerns about the currency union’s economic resilience.
In a report published on Tuesday (30 January), the IMF predicted that the eurozone would expand by just 0.9% in 2024, 0.3 percentage points less than forecast in October.
The downgrade was primarily a result of revised growth predictions for the eurozone’s two largest economies, with Germany and France having their forecasts cut from 0.9% to 0.5% and from 1.3% to 1.0% respectively.
The negative revision came despite the fund upwardly revising its growth expectations for the global economy by 0.2 percentage points to 3.1%.
“Economic growth is estimated to have been stronger than expected in the second half of 2023 in the United States, and several major emerging market and developing economies,” the report noted.
“The rising momentum was not felt everywhere, with notably subdued growth in the euro area, reflecting weak consumer sentiment, the lingering effects of high energy prices, and weakness in interest-rate-sensitive manufacturing and business investment,” it added.
‘The sick man of Europe’
Philipp Lausberg, an analyst at the European Policy Centre (EPC), was similarly pessimistic about the eurozone’s economic outlook. He expressed particular concern over the state of the German economy, which contracted by 0.3% last year.
“Germany has become the sick man of Europe,” he told Euractiv. “And that is a problem not just for Germany, but for Europe itself. We see a lot of the structural problems in Europe – but we see them concentrated to a particularly strong extent in Germany.”
Lausberg pointed to a “chronic lack of investment”, a shortage of skilled workers, and reduced access to formerly plentiful cheap Russian gas as key factors contributing to Germany’s economic decline.
“A lot of these developments will remain long term,” he said. “I think in the longer run, or in the mid-to-long run, the outlook is not so good.”
Reasons for optimism?
However, Zsolt Darvas, a senior fellow at Bruegel, a Brussels-based think tank, said that he remained “optimistic” about the eurozone’s economic prospects, pointing to the currency union’s record low unemployment and marked recent improvements in energy efficiency as key positive developments.
Darvas also said it was “good news” that the IMF still predicts overall positive growth in the eurozone this year, and highlighted the difficulty of making accurate forecasts at a time of profound geopolitical uncertainty.
“Economic forecasts are often uncertain, even in good times when there are no shocks,” he told Euractiv. “If you look at previous IMF forecasts, they were never accurate. There are always forecast errors.”
“Now they downgraded a bit from the previous forecast; I don’t think that’s a major issue. The magnitude of the downgrade was not huge. And the forecast was anyway uncertain before. So I wouldn’t take back my optimism because of that.”
A sign of resilience?
The IMF study was published on the same day that Eurostat, the EU’s official statistics office, reported that the eurozone narrowly avoided falling into a technical recession at the end of 2023.
The study found that quarter-on-quarter eurozone GDP was stagnant over the last three months of 2023, after declining by 0.1% in the third quarter. A recession is technically defined as two consecutive quarters of negative growth.
Overall growth in the eurozone last year was just 0.1%, while across the wider EU it was 0.2%.
Corroborating the IMF report, Eurostat found that the eurozone’s sluggish performance was largely due to Germany, which contracted at a quarterly rate of 0.3% in the final three months of 2023.
According to Darvas, the question of whether or not the eurozone fell into a technical recession at the end of last year is largely irrelevant: “Whether one particular quarter is +0.1% or -0.1%, I think that’s not a big deal,” he said.
He also suggested that the fact that the European Central Bank (ECB) is expected to cut interest rates from their current record-high levels later this year is yet another “reason for optimism”.
Expectations of rate cuts were given a further boost on Wednesday (31 January), when Germany’s federal statistics office reported that the country’s inflation rate fell to 2.9% in January – the lowest since June 2021.
The ECB has raised interest rates ten times over the past year-and-a-half to curb soaring prices triggered by Russia’s full-scale invasion of Ukraine in February 2022. It paused rate hikes for the third consecutive occasion at its most recent meeting last week.
According to the latest Eurostat data, eurozone inflation is currently running at 2.9% – below October 2022’s peak of 10.6% but above the ECB’s 2% target rate.
*first pulished in: Euractiv.com