March 26th 2024 forecast: Downward Pressure
Economic Performance - Sluggish Growth and Falling Short of Expectations
The Euro Area economy has been grappling with subdued growth in recent months, with various economic indicators falling short of market expectations. In January 2024, industrial production plunged by 6.7% year-on-year, a stark reversal from the 0.2% growth recorded in December and significantly worse than the projected 2.9% decline. Retail sales rose by a meagre 0.1% month-over-month in January, following a 0.6% contraction in December. The economic sentiment indicator declined to 95.4 in February, down from January's revised figure of 96.1 and missing market expectations of 96.7.
Looking ahead, the economy is expected to remain under pressure due to persistently high inflation, rising borrowing costs, and weak external demand. The European Central Bank (ECB) staff projections anticipate growth to pick up to 1.5% in 2025 and 1.6% in 2026, supported by consumption and investment. However, near-term economic activity is likely to remain subdued.
Economic Health - Competitiveness Concerns and External Vulnerabilities
The Euro Area's economic health has been impacted by several factors, including a loss of competitiveness and dependence on foreign markets. The trade surplus of €11.4 billion in January 2024, compared to a deficit of €32.6 billion in the same period last year, was primarily driven by a 16.1% decline in imports, reflecting weakened domestic demand. Exports rose by a modest 1.3% year-on-year, highlighting the challenges faced by the bloc's exporters.
The unemployment rate edged lower to 6.4% in January 2024, the lowest on record, but this may not be sustainable if economic growth continues to falter. The private sector credit growth remained unchanged at 0.4%, indicating a lack of dynamism in the economy.
Monetary Policy - ECB Balances Inflation Concerns and Growth Risks
The European Central Bank (ECB) has maintained interest rates at historically high levels, with the main refinancing operations rate at 4.5% and the deposit facility rate at 4%. The ECB's decision to keep rates unchanged is driven by the assessment that these rates, if maintained for a sufficiently long duration, will contribute to bringing inflation back to the 2% medium-term target.
The ECB remains data-dependent in determining the appropriate level and duration of monetary policy restriction. While the declining trend in underlying inflation and tight financing conditions are helping push down inflation, they are also dampening demand and economic growth. The ECB's cautious approach to potential rate cuts reflects the delicate balance between managing inflation risks and supporting economic recovery.
Geopolitical Factors - Divisions, Trade Tensions, and External Challenges
Geopolitical factors are adding to the uncertainty surrounding the Euro Area's economic outlook. EU member states remain divided on issues such as joint borrowing for rearmament and the bloc's enlargement policy. Trade tensions persist, as evident from the French Senate's rejection of the ratification of the EU-Canada trade deal (CETA).
The EU's stance on Russia and China is another area of concern, with proposed restrictions on imports of Russian agricultural products and a potential review of China's role in the bloc's semiconductor supply chains. The EU's aid package to Egypt, aimed at bolstering the country's economy and stemming potential migration flows, highlights the external challenges faced by the bloc.
Conclusion: Monitoring Economic Indicators and Euro's Downward Pressure
Based on the analysis of the Euro Area's economic performance, health, monetary policy, and geopolitical factors, several economic indicators should be closely monitored:
Industrial production
Retail sales
Economic sentiment indicator
Trade balance
Unemployment rate
Private sector credit growth
Inflation rate
The Euro Area economy faces significant challenges, with various indicators pointing to sluggish growth and underperformance relative to expectations. The ECB's cautious approach to monetary policy, coupled with geopolitical uncertainties, suggests that the euro may face downward pressure in the near term.
The Trading Economics forecast for the EUR/USD exchange rate projects a decline to 1.08 in 12 months. This aligns with the findings of this report, which highlight the economic headwinds and downward pressure on the euro. Forex traders should remain vigilant and closely monitor the identified economic indicators to assess the euro's performance in the coming months.
In conclusion, the Euro Area economy is navigating through a challenging period, with sluggish growth, competitiveness concerns, and geopolitical uncertainties weighing on the euro's outlook. While the ECB's monetary policy aims to strike a balance between managing inflation and supporting growth, the euro may face downward pressure in the near term, as indicated by the Trading Economics forecast and the analysis presented in this report.
Gavin Pearson
Retail trader since 2008
Specialises in forex
Funded account from the 5ers.com
Member of the eToro Popular Investors Program
Regular contributor to FXStreet.com analysis and education pages
Returned 27% in 2022 and -2.7% in 2023
Exclusively forex focused
Copy Trading available at eToro
Disclaimer
Past performance is not indicative of future results
Trading involves risk, and you could lose money
-end-