Reports of Europe’s Economic Death Are Greatly Exaggerated

Europe may be waking up economically after years in hibernation. Here are some of the factors at work:

• The Euro Area’s economy exceeded expectations in the first quarter of 2024. Following a stagnant 2023, the block’s GDP grew at an annualized rate of 1.3%, the same as the United States. In addition, the European Central Bank (ECB) delivered its first interest rate cut on June 6, lowering its deposit rate by 25 basis points to 3.75%, providing a further boost to the area’s economy.
• In April, the International Monetary Fund (IMF) forecast the Euro Area’s economy to grow by 0.8% in 2024, accelerating to 1.5% in 2025, not far behind the projected U.S. growth rate of 1.9%. The growth is expected to be relatively uniform geographically.
• This recovery follows serious shocks inflicted by the COVID-19 pandemic and Russia’s invasion of Ukraine, whose impact on energy prices was far more significant in Europe than in the United States. The resulting erosion of real wages, restrictive monetary policy implemented by the ECB to fight inflation, and smaller fiscal support compared to that in America further contributed to Europe’s economic stagnation in 2023. However, unemployment rates stayed low and household balance sheets remained strong despite the slowdown, eventually setting Europe up for a robust recovery.

Bottom Line – All these factors indicate that the ongoing improvement is likely to be robust and broad-based, fueled by a resurgence in domestic private demand. Consumer spending is slowly rebounding, thanks to low unemployment and fast wage growth, rapidly making up for the losses in real incomes inflicted by high inflation. Business and residential investment, brought to a halt by high interest rates, are likely to revive following the ECB’s monetary-policy loosening. Although some risks remain, such as the potential political turmoil following the upcoming parliamentary elections in France, Europe’s economy seems to be well positioned to perform well over the next two years.