We came into 2023 expecting a difficult run for the eurozone, and called for a short recession. But we’ve been pleasantly surprised: the economy has held up despite a wide range of challenges.
Unemployment across the bloc is holding at record lows. Inflation is falling across categories and countries, allowing workers to achieve real wage gains.
But growth in the euro area has been tepid and uneven. Germany, the manufacturing core of the bloc, has moved from leader to laggard over the course of the year, amid a sluggish export market and slow inventory investment. France and Spain have eked out marginally positive growth thanks (in part) to the recovery of tourism.
The euro area’s prospects would be stronger if the world were peaceful, but the outlook is complicated by two conflicts near its borders. Russia’s war against Ukraine is approaching a costly stalemate, casting a lingering shadow over the continent’s supplies of food and energy. Many nations worked admirably to reduce their energy consumption, but supply lines for natural gas will need years to be fully reworked. The prior year’s winter was relatively warm, and that good fortune may not continue.
The responses to the pandemic and the Ukraine war were breakthrough moments of European solidarity.
The emerging conflict in Israel puts fewer vital trade linkages at risk than the Ukraine situation did. But if oil flows are impacted, the continent will be the first to feel the burden of high energy prices. As conflicts grow, the flow of refugees could increase, adding to political stress within and across member countries.
These uncertainties have complicated the job of the European Central Bank (ECB). The central bank did not let recession fears deter them from rapid rate hikes and quantitative tightening to cure inflation. We expect no further hikes, with cuts to commence later in 2024 if inflation’s downward trajectory can be maintained.
The responses to the pandemic and the Ukraine war were breakthrough moments of European solidarity. Fiscal differences were set aside to work toward common ends and survive a crisis. While some old fissures are reappearing, we have seen the potential for cooperation. We hope this forms the foundation for working through cyclical challenges as well.
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