The European economy faces the prospect of a mild recession in 2024, according to $Deutsche Bank AG(DB)$ Chief Economist, Mark Wall. Despite anticipated recovery in the 2nd half of the year, concerns loom over the decline in European corporate competitiveness, inflation rates sliding below expectations, and the need for aggressive monetary policy measures. $Euro FX - main 2403(EURmain)$ $iShares MSCI Germany ETF(EWG)$
Mild Recession Foreseen: a mild recession for the European economy in 2024, citing continued economic impact from monetary policy, unexpectedly weak labor markets, and a slump likely to persist until mid-year.
Corporate Competitiveness at Risk: Declining European corporate competitiveness is highlighted as a pivotal factor that could hinder the sustained upward trajectory of the European economy, according to Deutsche Bank.
Inflationary Concerns: Inflation data suggests a downward trend beyond expectations since the latter half of 2023. Forecasts indicate a further decrease in inflation rates to 2% by mid-2024, a year earlier than the European Central Bank's projections.
Expected Monetary Policy Measures: Due to economic uncertainties and a substantial slowdown in inflation, Deutsche Bank expects the European Central Bank to commence interest rate cuts in April. A rapid 100 basis point reduction is anticipated initially, followed by an estimated 150 basis point cut for the entirety of 2024, with an additional 50 basis point cut projected for 2025. These measures aim to prevent a rapid rise in real interest rates and stave off prolonged economic recession
The Eurozone's economic growth has faltered, hinting at a potential technical recession if the negative growth persists.
Factors like prolonged monetary tightening, slowing external demand, persistent energy price impacts, and geopolitical uncertainties are adding pressure.
Eurozone GDP stagnated in Q3, dropping 0.1% sequentially, signaling a reversal in growth trends seen briefly in Q2, marking the first quarter of negative growth since Q3 2020.
Key indicators like credit impulses suggest economic softening starting from the latter half of 2023, potentially indicating stagnation based on adjusted credit pulse signals.
The impact of rising rates on corporate net interest income is expected to peak around mid-2024, contrary to ECB's GDP expectations.
External factors, such as the impact of higher debt levels in the US or UK corporations, might affect the Eurozone economy through trade and confidence channels.
Differential transmission of monetary policy between private and public sectors could affect the economy. The healthier balance sheets of the private sector might curb transmission compared to the relatively fragile public sector, which faces pressures due to increased debt during the pandemic.
These combined factors create uncertainty regarding the high-rate impact on the economy, potentially prolonging the transmission effects and signaling challenges for both public and private sectors in managing debts and fiscal policies.
Labor market's weakness in the Eurozone has surpassed expectations, holding critical sway over the 2024 economic outlook.
Economic Softness: Economic downturns lead to increased layoffs, rising unemployment rates, weakened balance sheets in the private sector, and a stronger transmission of monetary policy.
Labor Market Impact: The strength of the labor market influences productivity, labor costs per unit, and consequently, the risk of inflationary pressures.
Concerns and Discrepancies: Deutsche Bank is more concerned about the labor market's negative impact on economic growth rather than its effect on high inflation, differing from the ECB's view.
Outlook and Expectations: Despite inflation surpassing expectations in late 2023, the ECB foresees slowed economic growth yet stable job markets with minimal mass layoffs.
Contrary Predictions: Forecasts suggest a potential slowdown in productivity growth, leading to increased labor costs per unit and possibly stubborn core inflation, contrary to prevailing expectations.
Labor Market Impact on GDP: Deutsche Bank indicates that the labor market, weaker than expected by the ECB, will diminish contributions to GDP growth and likely decelerate European inflation.
Shifts in Purchasing Power: Trends are reversing, indicating a turnaround in purchasing power, with household savings rates seemingly on the rise.
Inflation Dynamics: While deflationary narratives dominated late 2023, unexpected adjustments in comprehensive PMI and geopolitical crises might temporarily spark inflation concerns, yet Deutsche Bank believes these won't significantly impact future inflation.
European businesses face weakened competitiveness, impacting confidence, investment, and employment growth.
Concerns about sustained access to cheap energy, the effectiveness of green technology subsidies, competition from China's electric car industry, and the EU's vulnerabilities in tech supply contribute to this scenario.
Businesses perceive their competitiveness at historic lows, potentially leading to weaker 2024 investment and employment growth.
Reasons behind this include skepticism about Europe's access to cheap energy, doubts about the effectiveness of green tech subsidies compared to the US, competition from China's electric car industry, and the EU's tech supply vulnerabilities.
Geopolitical tensions intensify risks for businesses, questioning the sustainability of the European model over the past decades.
Achieving consensus within the EU remains challenging, especially in imposing a strategic autonomous agenda within stringent fiscal rules. Germany alone cannot solve this.
Additional insights: Medium-term inflation outlook links to fiscal stances, favoring a relaxation over time, potentially leading to higher-than-pre-pandemic long-term inflation levels, persisting above targets.
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