In the fourth quarter, the euro area economy showed no change compared to the previous quarter and only +0.1% over one year.
Eurozone stagnates
It thus avoids a recession in the classic sense of the term: The 3rd quarter had resulted in a 0.1% decline in GDP compared to the previous quarter; a new outperformance in the 4th quarter would, therefore, have been synonymous with a new recession for our economies. For 2023 as a whole, growth was 0.5%.
We expect a slightly better performance in 2024, primarily as households keep the means to spend. On the one hand, the labour market remains tight, the full-time employment rate is at record highs, the unemployment rate is at its lowest, at 6.4% in December, and wages rose by about 5% in the first three quarters of 2023. On the other hand, the savings rate remains high, at 14% of disposable income. Households, therefore, clearly have the means to increase their consumption. Whether they will have the confidence to do so or stay cautious in challenging economic conditions remains to be seen.
Indeed, we can talk about the fall in interest rates, but credit remains comparatively expensive. At the beginning of 2023, the ECB’s benchmark rate was 2.5%. It started in 2024 at 4.5%. In addition, governments will have to return to more balanced fiscal policies gradually. As a result, many public and other subsidies to help households and businesses cope with soaring inflation will tend to disappear gradually.
The time is not at the party. Growth will remain sluggish, and our economy's proper recovery does not seem imminent. Given this less-than-exciting outlook, we do not invest in European equity funds in our diversified portfolios.
The decline in inflation is slow
The European outlook is not helped by the fact that, after a sharp decline at the end of the summer, inflation stabilises at still high levels, limiting the European Central Bank’s room for manoeuvre. The main inflation index fell somewhat in January and no longer exceeds 2.8%. Slightly below the 2.9% of December, this figure remains well above the 2.4% of November, a period marked by the sharp decline in energy prices. However, it must be admitted that energy prices are the only ones that show a significant decrease at this stage (-6.3% over one year in January).
On the other hand, over the same three months, the price of services remained unchanged, at +4.0% in annual terms, while the rise in the cost of untreated food even increased, reaching a yearly increase of 7% in January. Not surprisingly, the non-energy inflation index is still 3.8% year-on-year.
Under these conditions, it is difficult for the European Central Bank to announce that its job is done. Faced with this inflation, which remains tough (especially for the non-energy index), its room for manoeuvre remains limited.
It is, therefore, difficult to foresee a fall in European interest rates in the immediate future.
We keep our diversification strategy in our portfolio.