Despite revising our labour supply projections up, the Eurozone’s rapidly ageing population will lead to a 6% decline in potential workers by 2050 from a peak in 2029. This bleak long-run outlook for labour supply will help drag Eurozone potential growth below 1% per annum by the mid-2030s.
A slower fall in services inflation will partially offset the relatively stronger disinflationary forces in goods prices. We do not think it will derail European Central Bank rate cuts this year, but the pass-through of strong wage growth from the tight labour market poses upside risks
After the sharp falls in eurozone inflation recently, a series of rate cuts this year by the European Central Bank is now the consensus view. However, monetary policy transmission takes time and we don’t think growth will receive much of a boost from monetary loosening until 2025, though there’s potential for some upside surprises.
We think risk assets will underperform in 2024. We map out the implications of our key 2024 global macro themes for asset allocation.
Our measure of financial conditions has become less restrictive in the US and started to loosen in the eurozone and the UK, reflecting investors’ expectations that interest rates have peaked. This should aid the outlook for commercial real estate (CRE) on the margins, although the scale of past rate hikes, sluggish economies, and structural headwinds mean the sector still confronts challenging fundamentals.
After a year of stagnating activity, the eurozone economy will continue to struggle to gain traction in the near term given multiple headwinds. But we expect a gradual recovery in 2024 that will gather momentum as consumers regain some of their lost purchasing power and financial conditions ease.
One of our key macro calls for 2024 is our view that eurozone inflation will be lower than what the market and what the ECB expects.
Recent European valuations data from MSCI for Q2 confirmed that capital values are still falling, but at a slower pace than they were last winter. This raises the question as to whether we have reached a turning point in this downturn? Do we expect capital values to start their recovery imminently, or is it still too soon to claim that we are now out of the woods?
We expect eurozone inflation will fall below the European Central Bank’s target in H2 2024. This is one of our key out-of-consensus views that puts us below the ECB’s forecast. Our call relies primarily on more pronounced disinflation from consumer energy and food prices than the ECB assumes. We anticipate a stronger slowdown in core inflation, given our weaker growth outlook.
As term premia reprice higher, a modest increase in duration is warranted, however, we think the opportunities lie at the end short end of the curve.
In this week’s Beyond the Headlines, join Javier Corominas, Director of Global Strategy, to look at the why ECB pricing and eurozone yield curves may be mispriced.
Our view is that European commercial real estate (CRE) is not out of the woods yet, but things are looking better than before the summer.
Most measures of inflation expectations eased in recent months, with the notable exceptions not as bad as they look. This improvement alleviates concerns about possible second-round effects or an unanchoring of inflation expectations, making it easier for the European Central Bank to bring actual inflation back to its 2% target. This will also facilitate a gradual return from the ECB to a more traditional reaction function after a period where taming high inflation was the sole focus.
The ECB sent a clear and balanced message at its meeting this week despite the heightened market stress caused by trouble in the American banking system and Credit Suisse.
Though a correction in values is firmly underway for European commercial real estate markets, we believe the worst is yet to come – meaning that the best buying opportunities are not just around the corner.
The Czech National Bank (CNB) kept the policy rate unchanged at 7% for the fourth consecutive meeting today, in line with our and consensus forecast.
Central banks have changed the way they react to economic conditions, largely focussing on current inflation and its impact on expectations at the expense of future growth. Their fear now is that high inflation could influence expectations, and in turn wages, engraining inflation.
