Europe shows shoots of recovery as market bottoms out – IMF

LONDON (ICIS)–Strong service sector performance and robust exports through 2024 amid cooling inflation points to the eurozone economy bottoming out following the emergence of tentative green shoots during the first quarter of the year, the IMF said.

The organisation upped its forecast for eurozone growth to 0.9% for 2024, a 0.1 percentage point increase from the previous forecast in April, on the back of growing evidence that the bloc may have put the low point of the economic cycle behind it.

Wage growth is expected to drive consumption, while loosening monetary policy could drive an uptick in investment, the IMF said, although players in sectors such as construction see the impact of rate cuts being slow to ripple through the market.

With manufacturing still underperforming compared to services, as highlighted by Eurostat data on Monday showing that EU industrial output shrank month on month in May on the back of productivity declines across all most sub-sectors.

Eurozone industrial activity was stagnant in April, with March the only month to see output increase month on month, according to Eurostat data.

This slower manufacturing sector recovery is likely to drag on economic escape trajectory in countries like Germany, which the IMF projects will see GDP growth of 0.2% this year.

Other member states such as Spain are likely to see considerably stronger growth, the agency added, increasing its 2024 GDP growth forecast for the country by 0.5 percentage points to 2.4%.

Investment analysts have projected greater political stability in the UK after a general election delivering a strong mandate to the Labour Party and five years until the next election, and the IMF has upped its forecast for the country. UK GDP is now expected to stand at 0.7% this year a 0.2 percentage point increase from the IMF’s April outlook.

The impact of cyclical factors buffeting global markets has receded, despite still-high shipping costs due to the ongoing Red Sea disruption, and overall economic activity is shifting closer to actual potential, according to the IMF.

“Despite gloomy predictions, the global economy remains remarkably resilient, with steady growth and inflation slowing almost as quickly as it rose,” said IMF chief economist Pierre-Olivier Gourinchas.

Global growth is expected to have bottomed out at 2.3% in 2022 following an inflation spike to 9.4% that year, and growth is expected to stand at 3.2% this year and 3.3% in 2025.

Inflation has come down since then, allowing for a modest rate cut by the European Central Bank, but the pace of disinflation has slowed, the IMF noted, with the service sector momentum buoying European growth also propping up inflation.

The European Central Bank cut rates by 25 basis points in June, but markets are not projecting another when its monetary policy committee convenes on Thursday. The US Federal Reserve is yet to cut rates, with officials guiding for just one reduction this year.

US central bank caution is feeding through to emerging market central banks, the IMF noted.

“A number of central banks in emerging market economies remain cautious in regard to cutting rates owing to external risks triggered by changes in interest rate differentials and associated depreciation of those economies’ currencies against the dollar,” it said.

Europe is showing fewer signs of economic overheating than the US, which is likely to see slightly slower than expected growth this year as the labour market slows and consumption drops. US GDP is expected to be 2.6% this year, according to the IMF.

“Unlike in the United States, there is little evidence of overheating [in the eurozone], and the European Central Bank will need to carefully calibrate the pivot toward monetary easing to avoid an inflation undershoot,” Gourinchas said.

Economic scarring also remains more apparent in the developing world, with many nations still struggling to turn the page from the aftermath of the pandemic compared to economies like the US, which has already moved past pre-COVID growth levels.

Focus article by Tom Brown.

Thumbnail photo: Outside the IMF’s Washington, DC headquarters (Source: Gripas Yuri/ABACA/Shutterstock)