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S&P Global Outlook for Europe. Will there be a decrease in inflation and an increase in wages in 2024?

2023-12-01 12:07:03Biznes SHKRUAR NGA REDAKSIA VOX

S&P Global Outlook for Europe. Will there be a decrease in inflation and an

The eurozone economy is likely to reach a mild contraction in the first quarter of next year, according to S&P Global, for the first quarter of 2024 for the eurozone and the UK. Rising real incomes are expected to be one of the biggest drivers of this softening narrative, as disinflation progresses and strong wage growth continues, further boosting consumer spending. S&P Global expects eurozone inflation to be around 2.9% in 2024, with wages rising to around 4%, up from 5% in 2023.

A solid private sector balance sheet is also adding to the expectation of a softening, with the eurozone private sector currently having a net financing capacity of 4.5% of its gross domestic product. This is about 0.6% more than the government's funding needs require, creating a good safety net if the economic recovery struggles. A third supporter of the soft landing scenario is strong funding conditions, with most European banks and financial institutions handling interest rate risks admirably. The European real estate sector has also been supported by an increasing number of fixed rate mortgages.

So S&P Global expects the eurozone economy to grow by around 0.8% in 2024, down slightly from its previous guidance of 0.9% but still broadly in line with expectations. This also depends on the European Central Bank cutting interest rates sometime in 2024, once inflation has fallen further. There are several external risks to this scenario, including European and international politics, as well as ongoing geopolitical events, as well as economic risks.

Among them, labor market resilience continues to be one, with labor market signs now turning around, with employment more or less stagnant and productivity falling. This has also led to a significant increase in unit labor costs. This low labor productivity is mainly seen in France, due to a number of factors. The increase in internships, the composition of the labor market, absenteeism, production breaks and the accumulation of work have all contributed to this.

With near-term growth prospects still quite subdued and the cost of labor rising, this could also set the stage for more layoffs in the coming year. However, since vacancies are higher than historical levels at the moment, more layoffs will likely be absorbed by the market. Inflation and inflationary expectations also continue to be a concern. According to S&P, there has been good upstream progress on disinflation. Some progress has also been seen downstream with headline consumer price inflation almost half since its peak.

However, inflation expectations, whether market-based, consumer-based or professional forecasters, are all more pessimistic than this disinflation model. The ECB's latest consumer survey found that consumers expected inflation in the next 12 months to reach 4%, up from 3.5% in August. If there continues to be a gap between actual inflation and expectations, the ECB may be forced to rethink when to start cutting rates, thus pushing the end of the monetary tightening cycle further. If so, this could have a spillover effect on demand, thereby affecting economic growth in the coming year. The review of the European Central Bank's operational framework, focusing on the balance between monetary and fiscal policy, may lead to a shrinking of the ECB's balance sheet. This could further put upward pressure on interest rates. With medium-term interest rates no longer negative, the economic sustainability of debt may be more in focus.

Regarding Eastern European countries, they are not in the same cycle as their Western European counterparts and have been hit much harder by inflation. One of the main reasons for this is because fiscal policies in these countries have done a poorer job of protecting consumers than Western Europe. The labor market in some Eastern European countries is also tighter than in the West, leading to strong wage growth. However, the medium-term outlook for this region looks slightly more positive. In terms of the performance of individual sectors, there has been strong momentum in the services sector, driven by the first tourist season in a few years for several European countries. However, this is now diminishing somewhat.

There is some weakness in the manufacturing sector, due to the inventory cycle as well as the energy price shock caused by the Russia-Ukraine war. The good news is that early indicators suggest that the European manufacturing industry may have bottomed out, so while next year is still expected to have some weakness, it is likely to be an improvement from current conditions. This stabilization in the manufacturing sector can be observed mainly in Germany, which already has prices in energy costs and adjusted inventory levels.

However, a key question still remains as to whether the construction sector will be able to recover as soon as possible due to the heavy impact of higher interest rates. While production may be improving in Germany, construction is still struggling, further hit by the cancellation of existing orders and a lack of new orders. German housing market financing is also less dependent on fixed rates and more on variable rates. On the other hand, the Spanish housing market has acted somewhat as a counterweight to the German housing sector, becoming more resilient than expected.


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