Investing.com – “For the European Central Bank, our estimates are that the first cut will take place during the June meeting, and that it will be followed by three more cuts of 25 basis points by the end of the year,” is this the forecast on the next ECB monetary decisions by Azad Zangana, senior European economist & strategist at Schroders (LON:).
The Eurozone economy has started to grow again
After the brief technical recession in the second half of 2023, the Eurozone returned to growth in the first quarter of this year. “Real GDP grew by 0.3% compared to the previous quarterwith a recovery in growth also in Germany. Italy (0.3%) and Spain (0.7%) both recorded growth above consensus forecasts, and France (0.2%) also saw a small improvement”, underlines Zangana.
According to the manager’s view, the outlook for the Eurozone is essentially unchanged: “A combination of lower inflation and easing of monetary policy should support the recovery in demand. However – adds Zangana -, the structural shift to an increase in internal energy and labor costs suggests that Europe will benefit less than in the past from the recovery of world trade”.
But for Schroders the economy of the countries with the single currency can surprise the markets in a positive way. “Our estimates for Eurozone GDP growth have been revised upwards from 0.7% to 0.9% for 2024 and remain unchanged for 2025 at 1.8%. These are more optimistic forecasts than the consensus ones, of 0.6% and 1.4% respectively”.
Inflation stickier than expected
Inflation proved stickier than analysts had previously predicted, “partly due to the effects of energy prices, as governments eliminated energy subsidies and geopolitical events in the Middle East caused oil prices to rise,” says Zangana .
Elsewhere, inflation fell to 2.4% year-on-year in April from 2.8% three months earlier. “We have raised our inflation forecast from 2.1% to 2.3% for 2024. While declining wholesale gas prices have prompted us to reduce our 2025 forecast to 2.4%, from 2.8% previously, it is worth noting that our forecast is higher than consensus estimates 1.9%”, reveals the expert.
2 more cuts in 2025 and then rates unchanged
Based on these numbers, Schroders predicts that, after four cuts in 2024, “The ECB will make two further cuts of 25 basis points in the first quarter of next year, and then remain on hold for the rest of 2025. The pause will likely be forced by the re-emergence of inflationary pressures.”adds Zangana.
“With the recovery of domestic demand and the return of above-trend growth – he argues -, the lack of unused production capacity, particularly in labor markets, should push up wage inflation, forcing companies to increase prices of its products”.
As the economist notes, “although the Eurozone is emerging from a phase of cyclical contraction, unemployment rates have remained close to decade lows”. A dynamic that highlights the impact of demographic aging and the accumulation of manpower.
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