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IMF sees eurozone growth rebounding and ECB cutting rates by the fourth quarter

Household spending is expected to rise as the shock of energy increases subside
Household spending is expected to rise as the shock of energy increases subside Copyright Michael Probst/Copyright 2023 The AP. All rights reserved
Copyright Michael Probst/Copyright 2023 The AP. All rights reserved
By Piero Cingari
Published on Updated
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IMF expects the Eurozone to recover from 2023's 0.4% growth, with projected rises to 0.8% in 2024 and 1.5% in 2025. Inflation decline allows central banks to consider rate cuts, but Middle East tensions threaten to hike oil prices and shipping costs, potentially dampening the economic outlook.

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After a sluggish growth rate of only 0.4% in 2023, largely due to the impacts of the Ukraine conflict, the euro area is poised for a gradual recovery. The latest International Monetary Fund (IMF) forecasts a rebound to 0.8% in 2024 and 1.5% by 2025.

This uplift is likely to be driven by a resurgence in household consumption, buoyed by a subsidence in energy price shocks and a reduction in inflation, which collectively bolster real income growth among eurozone members.

Spain is projected to lead with robust growth figures, expecting expansions of 1.9% and 2.1% in 2024 and 2025, respectively. In contrast, Germany's growth forecast for 2024 has been revised downward to just 0.2%, a cut of 0.3 percentage points from earlier predictions. Similarly, France and Italy have seen reductions in their growth expectations for the upcoming years.

US growth continues to outperform Europe

The global economy is set to continue its current growth trajectory, matching the pace of 2023 into the next two years, with a slight upward revision to 3.2% for 2024.

The US economy, in particular, is expected to significantly outperform the euro area, with growth projections adjusted upwards by 0.6 percentage points to 2.7% for 2024 and by 0.2 percentage points to 1.9% for 2025.

Lower inflation to interest rate cuts

Global headline inflation is forecast to fall from an annual average of 6.8% in 2023 to 5.9% in 2024, and further to 4.5% in 2025.

In the euro area, inflation is expected to fall significantly, from 5.4% in 2023 to 2.4% in 2024, reaching 2.1% by 2025. The IMF notes that, with inflation aligning closer to targets and stable long-term expectations, major central banks are likely to start easing policy rates in late 2024.

By the fourth quarter of 2024, the Federal Reserve's policy rate is anticipated to drop from around 5.4% to 4.6%, the Bank of England from about 5.3% to 4.8%, and the European Central Bank from approximately 4.0% to 3.3%, according to IMF projections.

Geopolitical risks complicate the outlook

"The conflict in Gaza and Israel could escalate further into the wider region," the IMF stated.

Such escalations are likely to result in a 15% increase in oil prices and a 150% surge in average container shipping costs during 2024-2025. These increases are expected to predominantly affect the Asia-to-Europe shipping routes.

Consequently, monetary policies might tighten, leading to interest rates in advanced and emerging markets being about 30 to 40 basis points higher than baseline in 2025, potentially reducing global economic activity by up to 0.4 percent by the same year.

Specifically, "within advanced economies the effect is slightly larger in Europe than in the United States, on account of the greater impact from shipping costs".

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