Economic activity in the countries sharing the single currency has been halted globally since the end of 2022.
The eurozone even narrowly escaped the return of the recession, with GDP falling in the third quarter of 2023 and stagnation in the last three months of the year. To keep its head above water, the European economy has relied mainly on public spending, which has risen sharply in recent years. An unemployment rate at a historic low has also allowed household consumption to decline. The situation in the labour market has also been an excellent European surprise in recent months. Unlike previous business cycles, the lack of economic growth has not led to a rise in unemployment. The difficulty of rebuilding work teams after the COVID crisis and the workforce shortage in several European countries encourage companies to keep their workers at all costs.
This new reality was an important factor in preventing a recession yesterday and is also essential for tomorrow's economic recovery.
Finally, the end of the tunnel
In the coming months, the economic recovery in the eurozone will depend on consumers. With near-full employment, rising wages and falling inflation, all the ingredients seem to come together for dynamic consumption. For this to be the case, an essential bond, trust, is missing. Without it, despite a generally favourable financial situation, households do not consume. They favour savings; today, more than 14% of disposable income against a level just above 12% before the covid.
But the situation could change in the coming months. The sharp decline in inflation, which fell to 2.6% in February from 8.5% twelve months earlier, is beginning to convince even the most cautious European financiers that the anti-inflationary struggle is won. As a result, the European Central Bank is expected to reduce its policy rate in June. This will be a positive signal for households whose purchasing power has suffered so much from price slippage.
Already improving slightly in recent months in parallel with the decline in inflation, consumer confidence could improve significantly with the «official» end of the inflationary episode. This will boost consumption as the return on savings will decrease with the fall in key rates, which will curb the temptation to fill its bottom ever more with wool.
Ball-engine
After 15 months of shutdown, European economic activity is expected to restart this year thanks to the awakening of the European consumer. However, the recovery will be timid, partly because of weak exports. Traditionally the economic engine of the eurozone, sales abroad are now penalising GDP growth. Cyclical and structural factors explain the difficulties of exporting companies to the old continent.
Global merchandise trade has generally been less dynamic since the COVID-19 crisis. Weak global growth and increasing tariff barriers are automatically holding back trade. Production overcapacity in China also increases competition. This is the case in China, where the authorities favour local products over imported goods, but also in third countries, where Chinese producers sell off their surplus production to the detriment of European products.
European export companies also suffer from a structural deterioration in competitiveness, particularly with rising energy costs. The sharp rise in inflation and wages also increased the price of European products.
Weak prospects, some opportunities
After growing by only 0.4% in 2023, euro area GDP will grow better this year, but not more than 1%. And we should not expect a sharp growth acceleration in the medium term. In the coming years, most European countries will have to make significant budgetary efforts after the sharp deterioration of public accounts in recent years. The energy price will remain higher than in the United States or China, penalising European industry. In the medium term, the euro area economy will also be penalised by underinvestment in recent quarters. Plants that are not built today are less economically active tomorrow.
Given the weak economic outlook, we are not investing globally in eurozone equities as part of our portfolio strategy.
However, several European companies are buying (consult your investment consultant for more information). These mainly international companies depend more on the global economy than the eurozone's economic situation.