Vanguard: Eurozone economy will grow by 0.8% this year and 1.2% next year

Vanguard: Eurozone economy will grow by 0.8% this year and 1.2% next year

June 3, 2024

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Jumana Saleheen, Chief Economist at Vanguard, shares her expections for this week's ECB meeting.

 

Do the inflation numbers contain positive and/or negative surprises for you?

The inflation print surprised us to the upside, albeit mildly. Services prices have proven especially stubborn since the start of the year and energy inflation saw a resurgence due to the significant fall in the price of oil which occurred last May – so called base effects.

Having said that, we have long warned that services inflation tends to be stickier than other components of inflation, such as food, energy and goods inflation. We know that wages are the primary determinant of services inflation. And our expectation is that easing in the euro area labour market will allow for a moderation of wages that will eventually feed into services price inflation.

What are your expectations of the new ECB forecasts for economic growth and inflation? Will there be an upward revision for this year?

On the growth front, we believe that the ECB will bring up their GDP forecasts for this year, on the back of the strong GDP print for Q1 of 0.3% (QoQ). The Bank’s March projections showed annual growth at 0.6% in 2024 and 1.5% in 2025. At Vanguard, our view is that the eurozone will grow by 0.8% in 2024 and 1.2% in 2025. The ECB is likely to move its forecasts closer to ours, front-running some of the growth they expect in 2025 into 2024.

On inflation, instead, the forecasts are less likely to  change, given that both headline inflation and core, which excludes energy and food prices, came broadly in line with their March projections. Moreover, the recent decline in oil prices has significantly reduced the prominence of this risk to the inflation outlook.

How optimistic are you that the ECB will sustainably achieve the inflation target of 2% by 2025 at the latest?

We are quite optimistic on this front. We expect that headline inflation will get to target by the last quarter of this year and core inflation will get to 2% in the first quarter of 2025. These forecasts are based on our bottom-up model of the different components of inflation and linking them back to their underlying drivers.

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