Nadia Gharbi, Senior Economist, Pictet Wealth Management.
- As we move towards 2024, fears the euro area economy will slide into recession remain rife. For our part, we expect the euro area to move sideways until mid-2024 before a modest recovery in H2 2024, with euro area GDP growth averaging 0.6% in 2024 after an estimated 0.5% in 2023. But the risks remain tilted to the downside, with geopolitical uncertainty and fiscal policy (in particular in Germany) posing the major risks to our growth outlook.
- HICP inflation is expected to fall quickly in the coming months amid subdued growth and base effects. We see headline inflation falling to the ECB’s medium-term target of 2% by the end of 2024, with headline HICP inflation averaging 2.4% in 2024 (down from 5.5% in 2023) and core inflation also averaging 2.4% (down from 5.0%).
- With inflation falling faster than it projected, the ECB is coming around pressure to lower interest rates. We see the first cut coming in June 2024. We have pencilled in a total of 100 bps in rate cuts in 2024, bringing the deposit rate down to 3.0% by the end of the year. Given risks to the growth outlook, risks are tilted towards an earlier cut (i.e. in March). In the background, the ECB will likely continue to reduce its balance sheet at a steady pace, with risks of some tapering in the Pandemic Emerging Purchase Programme (PEPP).
