For businesses, the future looks uncertain. This is also reflected in the Purchasing Managers’ Index. This composite indicator for the euro area rose from the end of last year until June 2024. However, in July the increase stopped and the index weakened again. It is now just above 50 and still showing a slight increase. The index fell in all sectors, with a softening trend in the services sector.
However, German industrial production and orders increased in June and are showing signs of stabilizing. Overall, the economic outlook for the coming quarters remains mixed. Growth rates projected at the beginning of the year may not be achieved, but growth rates close to those seen in the first half of the year are likely to be achieved.
The final hurdle in containing inflation
The European Central Bank announced its first interest rate cut of 0.25 percentage points in June, as expected. However, the latest inflation figures are rather disappointing. Headline inflation rose to 2.6% in July from 2.5% in June.9 Core inflation remained at 2.9%, while services inflation fell very slightly from 4.1% to 4.0% between June and July. Services inflation remains quite high. Energy saw slightly positive growth due to base effects. Nonetheless, no notable adjustments have been made to inflation forecasts, and an annual figure of around 2.5% for this year still seems realistic.
Like growth dynamics, inflation dynamics also differ significantly between euro area countries, presenting the central bank with a very difficult task. The inflation differentials are already significantly lower than the inflation peak at the end of 2022, but still remain significant. In Belgium, prices are still rising by 5.5%, while in Finland, inflation has already fallen to 0.6%. These differences are not only due to different energy components, with core inflation varying from 4.9% (Estonia) to 1.7% (Finland). 10
At this point, further rate cuts seem likely in September, especially as the data points to weakening rather than strengthening economic activity.
Eurozone Outlook
In the near term, private consumption will support euro area economic growth. Export activity is expected to start to recover gradually as overseas demand strengthens. Further easing of central bank monetary policy will ease the drag on growth in some sectors, especially construction.
Overall, we expect euro area gross domestic product to grow by 0.8% this year. Next year, as financing conditions ease, we expect private consumption to remain strong and investment to strengthen, supporting GDP growth of around 1.4%.
