Eurozone recession: Increasingly possible, but not yet inevitable
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The Eurozone has continued to deliver disappointing economic data as Q3 GDP shrank 0.1% quarter-over-quarter, the first decline (outside of the pandemic) since early 2013. With recent activity and survey data remaining soft, the natural question to ask is whether the Eurozone is on the cusp of, or perhaps already in, recession.
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One notable area of weakness has been consumer spending. That said, we believe the worst of the consumer slowdown may now have largely passed, as real household income trends have turned more positive and household interest costs have risen only moderately. We do, however, expect a further slowdown in investment spending given slowing corporate profit growth and declining capacity utilization rates.
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The mixed outlook for consumer and investment spending leaves the Eurozone very close to recession. While we are not calling for recession just yet, should the PMI surveys stay at their current contractionary levels in the months ahead or soften further, an economic downturn may eventually become unavoidable.
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The underwhelming growth outlook means European Central Bank (ECB) rate hikes are very likely done, with the most recent progress on the inflation front reinforcing the view that the peak in policy rates has already been reached. However, we believe the ECB will still want to see underlying inflation trends move closer to, and remain near, its 2% inflation target before it becomes comfortable embarking on a monetary easing cycle.
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Against that backdrop, we do not forecast an initial ECB rate cut until the June 2024 meeting, although a steady series of rate cuts after that should see the ECB lower its Deposit Rate by a cumulative 150 bps to 2.50% between mid 2024 and early 2025. Overall, we view the risks as skewed toward the ECB lowering interest rates earlier, or more aggressively, than generally expected.
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