Economics Update May 2024 - Signs of hope for the European Monetary Union

Economic output in the eurozone increased by 0.3% in the first quarter compared to the final quarter of 2023. Although this was the seventh time in a row that growth lagged behind that of the US, it was the highest figure in a year and a half and all major countries, including Germany, contributed to this result. There are two factors behind the moderately positive development: firstly, private consumption is on the rise again. Falling inflation, together with relatively high nominal wage growth, is ensuring a positive trend in real incomes. Real income growth of more than 2% was last seen at the end of 2020. Although consumer confidence is still at a low level, it has improved noticeably since reaching a low point in October 2023. This trend is likely to continue and provide positive impetus for consumption in the coming quarters.

Industrial production picks up

Secondly, there are increasing signs of a turnaround in the global industrial production cycle. Important leading indicators such as Singapore's and Taiwan's exports, the purchasing managers' indices for industry and, in particular, the difference between new orders and finished goods inventories have turned positive since the beginning of the year. European industry would benefit from this, and production has indeed risen by 1.6% in the first few months of the year. There are good reasons to assume that this trend will also continue and possibly gain momentum.

In the coming quarters, economic output in the eurozone is therefore expected to continue to grow at least at the same rate as in the first quarter. The economy could receive additional tailwind from interest rate cuts by the ECB, even if the effect on the real economy will only take effect with a time lag and it must be taken into account that the central bank will probably act cautiously. Overall, growth could come close to the 1% mark in 2024.

Many uncertainties remain

Nevertheless, it is clearly too early to proclaim a new, sustainable upturn. The uncertainties remain too great for the time being. The most important concerns the development of the US economy: due to the ongoing restrictive monetary policy, a significant slowdown in economic momentum is to be expected there, culminating in a moderate recession around the turn of 2024/25. This would also have a negative impact on the European economy, especially as growth impetus from other regions such as China is still unlikely. The still fragile upturn could suffer a setback as a result. A sustained return of inflation to the central bank's 2% target is also possible, but by no means certain. High wage increases could reignite price momentum, which would put a stop to further interest rate cuts by the ECB. 

Europe is lagging behind

In the long term, restoring the competitiveness of the European economy remains a key task. The considerable gap in growth momentum compared to the USA in recent years impressively illustrates the need for this. A new EU Commission after the European elections in June should give this task greater priority than it has so far and rely more on market forces than on detailed, regulated control of politically desired transformation processes.