European Economic & Investment Outlook 2024

LOOKING AHEAD

TIME TO LIFT THE ANCHOR IS NEARING

LABOUR MARKET YET TO SEE IMPACT

In summary, bolstering productivity growth relies heavily on effective fiscal and structural policies. Additionally, monetary policy can contribute to stimulating demand and investment. An accommodative monetary approach creates favourable financing conditions, enhancing profitability and improving productivity. With the expectation that central banks will initiate interest rate cuts in Q3 2024, this move is expected to relieve some constraints (anchor) on low economic growth, thus fostering the potential for stronger economic growth. In other words, as we head into 2024 H2, we expect the anchors restraining the European economy to start to lift and for a new growth cycle – albeit disciplined and moderated—to unfold, creating new tailwinds for commercial real estate. ³ The employment expectations indicator is a composite indicator that summarises managers’ employment plans across sectors (industry, services, retail trade, construction). ⁴ ONS: Alternative measures of underutilisation in the UK labour market

In September 2023, the unemployment rate in the euro area increased nominally to 6.5% from the previous month's 6.4%. This, however, still marks a decline from the 6.7% rate recorded at the beginning of the year. It's important to note that unemployment is a lagging indicator, hence despite this decrease, the recent robustness of the labour market does not yet fully reflect the effects of changes in interest rates on economic activity. The European Commission’s Employment Expectations Indicator (EEI)³ in October 2023 fell slightly in the euro area as weaker job growth expectations in the manufacturing and retail sectors were offset by improvement within the services and construction sectors. We anticipate an increase in unemployment over time, but this increase is projected to be moderate compared to historical patterns. Our projection anticipates a rise in the euro area's unemployment rate to 7% in 2024, far below the peak of 12% recorded in 2013. In the UK, the unemployment rate in July increased slightly to 4.3%, up from the low of 3.6% recorded a year before. It's important to mention that the Office of National Statistics has pointed out data-related concerns regarding labour force survey estimations, as response rates have significantly declined in recent years. This could potentially result in an underestimation⁴ of the actual unemployment level.

Employment plays a pivotal role in fuelling economic growth, both nominally as more people and more jobs lift growth, but also through its productivity. Given the demographic constraints that Europe faces, which limit labour force growth, enhancing productivity is key to lifting economic growth rates. Productivity increases also lessen the potential for wage increases to unmoor inflation longer term. Labour productivity growth in the euro area has been on a downward trend over several years. The average annual growth in labour productivity, measured as real GDP per hour worked, has consistently decreased from approximately 7% in the 1960s to around 1% in the present decade. Part of the recent decline in productivity may be attributed to scarring effects stemming from the Global Financial Crisis (GFC). The "productivity puzzle" has sparked a prolonged debate, with extensive research⁵ suggesting that technological innovations are now less revolutionary than those in the past and therefore have been less able to lift productivity. However, it is also true that we have yet to witness the full impacts of recent technological advancements on productivity.

⁵ ECB Economic Bulletin: Key factors behind productivity trends in euro area countries

12 | ECONOMIC OUTLOOK 2024

THE TIDE IS TURNING TIME TO LIFT THE ANCHOR | 13