European Economic & Investment Outlook 2024

TURNING THE CORNER

UNLOCKING THE SOURCES OF GROWTH

CONSUMER CONFIDENCE NEEDS TO IMPROVE TO SET SAILS FOR RECOVERY In September 2022 consumer confidence reached its all-time low just as inflation was reaching its peak of 10.6% the following month. Since then, as inflation has slowly subsided, there has been a modest improvement in consumer confidence, underscoring the substantial impact of inflation on consumer sentiment. Despite the support from easing inflation and robust wage growth, the boost in consumer confidence has not yet translated into retail sales growth. Recent data indicates that retail sales in the euro area declined more than anticipated in October, with a year-on-year decrease of 1.2%. While consumer confidence is expected to decline before seeing improvement in the coming quarters, primarily due to a rise in unemployment and the full impact of increasing interest rates, its pivotal role in economic recovery remains evident. The upswing in consumer spending, fuelled by confidence, contributes significantly to sustaining overall economic growth.

PERPETUAL STABILITY

The ECB and the Bank of England (BoE) will maintain their current interest rate levels until they are confident that the decline in inflation is enduring. As interest rate increases are now in the past, the attention shifts to the duration of tight monetary policy. Headline inflation in the euro area has made significant progress since its peak of 10.6% in October 2022, reaching 4.3% in September 2023 and early estimates showing 2.9% in October with core inflation falling from 4.5% to 4.2%. UK inflation fell from 6.7% to 4.6% Y/Y in October, the lowest level since October 2021. UK Core inflation also experienced a drop from 6.1% to 5.7% Y/Y. The decrease in inflation can be primarily attributed to decreasing energy prices and base effects. However, in more recent developments, diminishing

supply disruptions and falling commodity prices have begun to ease price increases. Hence, this indicates that disinflationary pressures have become more widespread, and it's probable that we will observe a further decline in inflation in the months ahead. While inflation patterns are generally consistent among the euro area economies, there are variations within the actual inflation rates. These divergences are a result of differences in the proportions of food and energy components in inflation baskets, as well as disparities in labour market conditions. Nevertheless, the majority of countries in the euro area are expected to witness a decline in inflation, with inflation rates moving closer to central banks’ targets in 2024. Therefore, we adhere to the belief that central banks will shift their stance in Q3 2024.

The primary catalyst for growth in 2024 will shift to real income growth and, consequently, private consumption. As anticipated in our prior projections, growth is expected to maintain a notably modest pace. The most significant determinant of growth prospects remains inflation. While wages have struggled to keep up with inflation, they are accelerating and are expected to maintain a healthy upward trajectory over the next twelve months. As an example, real wages in the UK became positive in June 2023, marking the first instance of positive real wages since October 2021. This convergence of declining inflation and ascending wages is poised to boost consumers' purchasing power well into 2024. Private consumption is key for economic growth as it accounts for around 60% of GDP in the euro area. Nonetheless, the weakness in exports and investment will restrict any meaningful uplift in broader economic growth.

INFLATION COMPONENTS (PERCENTAGE CHANGE Y/Y)

20

10

0

GERMANY

ITALY

POLAND

-10

EURO AREA

-20

IRELAND

HUNGARY

PORTUGAL

FRANCE

-30

CZECH REPUBLIC

FINLAND

SPAIN

-40

SWEDEN

NETHERLANDS

DENMARK

-50

NORWAY

ENERGY

SERVICES

FOOD

ALL-ITEMS

Source: Eurostat Source: Eurostat (Sept 2023)

8 | ECONOMIC OUTLOOK 2024

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