After returning to moderate Eurozone GDP growth at an annual rate of almost 1.2% in the first half, we expect more in the rest of the year
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HOLGER SCHMIENDING*
After returning to modest Eurozone GDP growth at an annual rate of nearly 1.2% in the first half, we expect more in the rest of the year, before interest rate cuts in Europe and the US push the recovery further in 2025. After a modest recovery from from a low of 93.8 points last year in October to 96.4 points in December, the Commission's economic sentiment index rose to 96.6 points in August from 96 points in July. The index's gain shows a strong improvement in sentiment in France after a dip in July immediately after snap national elections. The Olympics also helped to boost economic sentiment in the country, reaching a five-month high of 99.4 points in August from 95.1 points and 97.3 points in July and June respectively. this should dissipate somewhat in the coming months.
The successive shocks have limited consumer spending and this is limiting the pace of economic growth.
An important feature of the Eurozone is the sharp divergence between business and consumer confidence. The latter was precipitated by Russia's invasion of Ukraine and the subsequent spike in gas and food prices. In late 2022, gas price correction began, helping to restore consumer confidence to levels slightly below the long-term average. However, this recovery is coming to an end. Having reached the highest levels since February 2022 in July this year at -13 points, in August it fell slightly to -13.5 points. Although consumer purchasing power continues to swell as wage gains outpace inflation, the former are reluctant to spend more.
In the wake of Russia's invasion of Ukraine in 2022, business confidence initially held steady. in better shape than consumer confidence, falling less dramatically. After a slight rise in early 2024, however, business confidence again shows a moderate decline. Unexpected weakness in international trade is weighing on Eurozone industry. In the related August survey, the assessment of manufacturing export order books deteriorated further to -24.9 points, the lowest levels since November 2020 and well below the post-2000 average of -14.2 points, with Germany to remain the weak link among the major economies of the Eurozone.
* Mr. Holger Schmieding is an economist at Berenberg Bank.
