Euro-Area Macroeconomic Forecast
Euro-Area's economic outlook is uncertain, offering both opportunities and challenges.
Friday, August 23, Week 34
Welcome to this comprehensive report on the macroeconomic landscape of the Euro-Area. This report is designed to provide forex traders with the insights and information they need to navigate the complex and ever-changing world of currency markets.
In this report, we will delve into the key factors shaping the Euro-Area's macroeconomic outlook, including geopolitics, fiscal policy, economics, and monetary policy. We will analyse the latest economic indicators, assess the risks and opportunities facing the region, and provide a forecast for the near-term, short-term, and mid-term.
The Euro-Area is currently at a crossroads, facing a multitude of challenges, including the ongoing war in Ukraine, escalating tensions with China, and persistent inflationary pressures. However, the region has also shown resilience in the face of these shocks, with economic growth projected to pick up in 2025.
The ECB's recent decision to cut interest rates in June 2024, while aimed at supporting economic growth, has also raised concerns about the potential for reigniting inflation. The ECB's ability to bring inflation back to target without derailing the economic recovery will be a key determinant of the Euro-Area's macroeconomic outlook.
For the purposes of this report, we define the following time horizons:
Near-term: 5-day outlook
Short-term: 6-week outlook
Mid-term: 6-month outlook
Long-term: 5-year outlook
By understanding the key drivers of the Euro-Area's macroeconomic landscape, forex traders can make more informed trading decisions and position themselves to profit from the opportunities that arise.
Geopolitics and the Euro-Area
The geopolitical landscape of the Euro-Area is currently defined by a complex interplay of factors, ranging from the ongoing war in Ukraine to escalating tensions with China. These events have significant implications for the region's macroeconomic outlook, influencing trade, investment, and overall economic sentiment.
The war in Ukraine continues to cast a long shadow over Europe. The conflict has disrupted supply chains, triggered an energy crisis, and fueled inflationary pressures. Additionally, the war has prompted a reassessment of defence priorities among European nations, leading to increased military spending. The recent Ukrainian incursion into Russia's Kursk region, aimed at establishing a buffer zone, further highlights the potential for escalation and the unpredictable nature of the conflict.
Tensions between the West and China are also on the rise, particularly in the realm of trade and technology. The United States and the European Union are imposing higher tariffs on key Chinese technologies, including electric vehicles, in an effort to protect domestic industries and limit China's growing dominance in strategic sectors. This has prompted concerns about Chinese retaliation, potentially targeting European exports. The ongoing trade dispute adds to the already complex geopolitical landscape, creating uncertainty for businesses and investors.
Beyond these major conflicts, several other geopolitical developments are worth monitoring. The rise of far-right extremism in Europe, fuelled by anti-immigration sentiment and disinformation campaigns, poses a threat to social cohesion and political stability. The recent riots in the United Kingdom, sparked by false information regarding a mass stabbing, highlight the potential for violence and social unrest.
A report from Stratfor notes that "Russia has recently been intensifying its destabilisation campaign in Europe to opportunistically exploit divisive issues such as migration in a bid to disrupt Western military and political support for Ukraine." This underscores the multifaceted nature of geopolitical risks and the potential for external actors to exploit internal divisions within the Euro-Area.
A Murky Horizon
The immediate focus will be on potential Iranian retaliation following the assassination of Hamas political leader Ismail Haniyeh in Tehran. While the timing and scale of the response remain uncertain, any attack on Israel or US interests could trigger a regional escalation, further disrupting energy markets and fuelling geopolitical uncertainty.
The ongoing Ukrainian incursion into Russia's Kursk region will continue to be a source of tension and uncertainty. Any significant escalation in the fighting could have broader geopolitical implications, particularly for relations between Russia and the West. Additionally, the risk of further far-right unrest in the United Kingdom remains elevated, particularly as counter-protests are planned in response to recent riots.
The focus will shift to the upcoming US presidential election in November. A potential return of Donald Trump to the White House could significantly alter the geopolitical landscape, particularly regarding trade relations with China and the EU.
In conclusion, the geopolitical landscape of the Euro-Area is fraught with risks and uncertainties. The ongoing war in Ukraine, escalating tensions with China, and the rise of far-right extremism all pose significant challenges to the region's stability and prosperity. These factors will continue to weigh on the Euro-Area's macroeconomic outlook, influencing investor sentiment, trade flows, and policy decisions.
Balancing Act: Fiscal Policy in the Euro-Area
The Euro-Area's fiscal policy is navigating a complex landscape, balancing the need for economic recovery with the imperative of fiscal sustainability. Governments are grappling with high debt levels, inflationary pressures, and the need to address long-term challenges such as the green transition.
The European Commission's recent reform proposals for the EU's fiscal framework, centred on national ownership of medium-term budgetary plans and a shift towards expenditure-based rules, represent a significant shift in approach. These proposals aim to provide greater flexibility to member states while ensuring a path towards sustainable public finances. However, the success of these reforms hinges on the willingness of governments to comply with agreed-upon plans and the ability of the Commission to effectively monitor and enforce compliance.
The European Fiscal Board (EFB) has expressed concerns about the potential for "slippages" in budgetary discipline under the new framework. In its 2023 Annual Report, the EFB noted that "net expenditure growth - a more reliable gauge of fiscal policy in turbulent times - significantly exceeded the prudent benchmark rate of medium-term potential output growth." This highlights the risk that governments may prioritise short-term political considerations over long-term fiscal sustainability.
A Delicate Tightrope Walk
The immediate focus will be on the implementation of spending cuts in the United Kingdom. The newly elected Labour government has announced plans to address a £22 billion budgetary hole. These cuts, while necessary to address fiscal imbalances, could dampen economic growth in the short term.
Attention will shift to the finalisation of budget proposals in Germany. The coalition government is facing difficult budget talks amid weaker than expected tax revenue projections. Tensions within the coalition could intensify as the three parties seek to harden their stance on sensitive issues.
The focus will be on the implementation of the new EU fiscal framework, which is set to come into effect in 2025. The success of these reforms will depend on the ability of the Commission to effectively monitor compliance and the willingness of member states to adhere to agreed-upon expenditure plans.
In conclusion, the Euro-Area's fiscal policy is at a crossroads. The need for economic recovery and the imperative of fiscal sustainability are pulling in opposite directions. The success of the Commission's reform proposals will depend on the ability of governments to strike a delicate balance between these competing priorities.
Economic Crossroads
The Euro-Area's economic landscape is currently characterised by a mix of positive and negative factors. While the region has shown resilience in the face of multiple shocks, including the war in Ukraine and the energy crisis, several challenges persist.
Economic growth in the Euro-Area is projected to pick up in 2025, driven by falling inflation, a tight labour market, and sustained real wage growth. However, the pace of recovery is expected to be gradual, with risks tilted to the downside. The ongoing war in Ukraine, escalating tensions with China, and the potential for further economic shocks all pose significant challenges to the region's economic outlook.
Inflation in the Euro-Area is expected to move closer to the European Central Bank (ECB)'s target of 2% over the medium term, but risks remain tilted to the upside. While energy prices have stabilised, core inflation remains elevated, driven by strong wage growth and persistent supply chain disruptions. The ECB's recent decision to cut interest rates for the first time since June 2024, while aimed at supporting economic growth, could also fuel inflationary pressures.
Economic Outlook
The immediate focus will be on the release of the German Ifo Business Climate Index. This key indicator of business sentiment is expected to provide insights into the health of the German economy.
Attention will shift to the release of the Euro-Area's second-quarter GDP figures. These figures will provide a more comprehensive picture of the region's economic performance.
The focus will be on the development of inflation and the ECB's monetary policy response. The ECB's ability to bring inflation back to target without derailing the economic recovery will be a key determinant of the Euro-Area's economic outlook.
In conclusion, the Euro-Area's economic outlook is characterised by both opportunities and challenges. The region's resilience in the face of multiple shocks is encouraging, but several risks remain. The ECB's ability to navigate the current economic landscape and steer the Euro-Area towards a sustainable recovery will be crucial.
Monetary Policy
The European Central Bank (ECB) is currently navigating a complex and challenging economic landscape, balancing the need to control inflation with the imperative of supporting economic growth. The ECB's monetary policy decisions are closely monitored by market participants, as they have significant implications for the Euro-Area's macroeconomic outlook.
The ECB's primary mandate is to maintain price stability, defined as an inflation rate of 2% over the medium term. However, the Euro-Area's recent economic history has been marked by a series of shocks, including the COVID-19 pandemic, the war in Ukraine, and the energy crisis, which have disrupted supply chains, fuelled inflationary pressures, and dampened economic growth.
The ECB's recent decision to cut interest rates in June 2024, while aimed at supporting economic growth, has also raised concerns about the potential for reigniting inflation. The ECB's ability to bring inflation back to target without derailing the economic recovery will be a key determinant of the Euro-Area's macroeconomic outlook.
Monetary Policy Outlook
The immediate focus will be on the ECB's upcoming monetary policy meeting. Market participants will be looking for any signals from the ECB regarding the future path of interest rates.
Attention will shift to the release of the ECB's latest economic projections. These projections will provide insights into the ECB's assessment of the Euro-Area's economic outlook.
The focus will be on the development of inflation and the ECB's monetary policy response. The ECB's ability to bring inflation back to target without derailing the economic recovery will be a key determinant of the Euro-Area's economic outlook.
In conclusion, the ECB's monetary policy is at a crossroads. The need to control inflation and the imperative of supporting economic growth are pulling in opposite directions. The ECB's ability to navigate the current economic landscape and steer the Euro-Area towards a sustainable recovery will be crucial.
The Macroeconomic Outlook: A Sea of Uncertainty
The macroeconomic outlook for the Euro-Area is currently characterised by a high degree of uncertainty. While the region has shown resilience in the face of multiple shocks, including the war in Ukraine and the energy crisis, several risks remain.
The near-term outlook is for continued, albeit modest, economic growth. However, the pace of recovery is expected to be gradual, with risks tilted to the downside. The ongoing war in Ukraine, escalating tensions with China, and the potential for further economic shocks all pose significant challenges to the region's economic outlook.
Inflation is expected to remain elevated in the near term, before gradually declining towards the ECB's target of 2% over the medium term. However, the path of inflation is uncertain, with risks tilted to the upside. The ECB's recent decision to cut interest rates in June 2024, while aimed at supporting economic growth, could also fuel inflationary pressures.
The labour market remains a bright spot in the Euro-Area's economic landscape. Unemployment is at historically low levels, and employment growth is projected to continue, albeit at a slower pace than in recent years. However, the tight labour market is also contributing to upward pressure on wages, which could fuel inflationary pressures.
Risks to the Outlook
Several risks could derail the Euro-Area's macroeconomic outlook.
Escalation of the war in Ukraine: A further escalation of the conflict could disrupt supply chains, trigger a new energy crisis, and fuel inflationary pressures.
Trade war with China: The ongoing trade dispute between the West and China could escalate, leading to higher tariffs and further disruptions to global trade.
Further economic shocks: The Euro-Area is vulnerable to a range of potential economic shocks, including a resurgence of the COVID-19 pandemic, a sharp slowdown in global growth, or a financial crisis.
Policy mistakes: The ECB could make policy mistakes, such as raising interest rates too quickly or too slowly, which could derail the economic recovery.
In conclusion, the Euro-Area's macroeconomic outlook is uncertain, with both opportunities and challenges. The region's resilience in the face of multiple shocks is encouraging, but several risks remain. The ECB's ability to navigate the current economic landscape and steer the Euro-Area towards a sustainable recovery will be crucial.
Economic Indicators: Gauging the Euro-Area's Pulse
Economic indicators provide valuable insights into the health of the Euro-Area's economy, helping market participants assess current conditions and anticipate future trends. Here's a snapshot of key indicators and their potential development in the short-term (6-week outlook) and mid-term (6-month outlook):
Economic Growth:
Euro Area GDP Growth Rate QoQ: The Euro-Area GDP expanded 0.30% in the second quarter of 2024. The Euro-Area GDP Growth Rate is expected to be 0.30 percent by the end of this quarter. In the mid-term, the Euro Area GDP Growth Rate is projected to trend around 0.40 percent in 2025.
Germany GDP Growth Rate QoQ: The Gross Domestic Product (GDP) in Germany contracted 0.10 percent in the second quarter of 2024 over the previous quarter. GDP Growth Rate in Germany is expected to be 0.20 percent by the end of this quarter. In the long-term, the Germany GDP Growth Rate is projected to trend around 0.40 percent in 2025.
France GDP Growth Rate QoQ: The Gross Domestic Product (GDP) in France expanded 0.30 percent in the second quarter of 2024 over the previous quarter. GDP Growth Rate in France is expected to be 0.20 percent by the end of this quarter. In the long-term, the France GDP Growth Rate is projected to trend around 0.30 percent in 2025.
Price Changes (Inflation):
Euro Area Inflation Rate YoY: Inflation Rate In the Euro Area increased to 2.60 percent in July from 2.50 percent in June of 2024. Inflation Rate in Euro Area is expected to be 2.20 percent by the end of this quarter. In the long-term, the Euro Area Inflation Rate is projected to trend around 2.10 percent in 2025.
Germany Inflation Rate: Inflation Rate in Germany increased to 2.30 percent in July from 2.20 percent in June of 2024. Inflation Rate in Germany is expected to be 2.10 percent by the end of this quarter. In the long-term, the Germany Inflation Rate is projected to trend around 2.00 percent in 2025.
France Inflation Rate: Inflation Rate in France increased to 2.30 percent in July from 2.20 percent in June of 2024. Inflation Rate in France is expected to be 2.30 percent by the end of this quarter. In the long-term, the France Inflation Rate is projected to trend around 1.90 percent in 2025.
Labour:
Euro Area Unemployment Rate: Unemployment Rate In the Euro Area increased to 6.50 percent in June from 6.40 percent in May of 2024. Unemployment Rate in the Euro Area is expected to be 6.90 percent by the end of this quarter. In the long-term, the Euro Area Unemployment Rate is projected to trend around 6.50 percent in 2025.
Germany Unemployment Rate: Germany's seasonally adjusted jobless rate stood at 6% in July 2024. The number of unemployed individuals increased by 18 thousand to 2.802 million in July, marking a 19th consecutive period of rising unemployment.
France Initial Jobless Claims: Initial Jobless Claims in France decreased to 18.20 thousand in June 2024 from 40.90 thousand in May 2024.
Business Confidence:
Euro Area Economic Sentiment Indicator: The economic sentiment indicator in the Euro Area eased marginally to 95.8 in July of 2024 from 95.9 in the previous month.
Germany Ifo Business Climate Index: Business Confidence in Germany decreased to 87 points in July from 88.60 points in June of 2024. Business Confidence in Germany is expected to be 91.00 points by the end of this quarter.
France Business Confidence: The manufacturing climate indicator in France rose to 98.8 in August 2024, up from a three-and-a-half-year low of 95.4 in July.
Consumer Sentiment:
Euro Area Consumer Confidence: The consumer confidence indicator in the Euro Area fell by 0.4 points to -13.4 in August 2024.
Germany GfK Consumer Climate: Consumer Confidence in Germany increased to -18.40 points in August from -21.60 points in July of 2024. Consumer Confidence in Germany is expected to be -22.00 points by the end of this quarter.
France Consumer Confidence: The consumer confidence indicator in France rose to 90.8 in July 2024, up from a revised 89.7 in the previous month.
Trade:
Euro Area Balance of Trade: Euro Area recorded a trade surplus of 22334.60 EUR Million in June of 2024.
Germany Balance of Trade: Germany recorded a trade surplus of 20.40 EUR Billion in June of 2024. Balance of Trade in Germany is expected to be 18.00 EUR Billion by the end of this quarter.
France Balance of Trade: France’s trade deficit narrowed to €6.100 billion in June 2024, compared to May’s downwardly revised €7.700 billion.
Conclusion: Navigating the Euro-Area's Macroeconomic Tides
The Euro-Area's macroeconomic landscape is a complex and ever-changing tapestry, woven from the threads of geopolitics, fiscal policy, economics, and monetary policy. As we have explored in this report, the region is currently facing a multitude of challenges, including the ongoing war in Ukraine, escalating tensions with China, and persistent inflationary pressures. However, the Euro-Area has also shown resilience in the face of these shocks, with economic growth projected to pick up in 2025.
The ECB's recent decision to cut interest rates in June 2024, while aimed at supporting economic growth, has also raised concerns about the potential for reigniting inflation. The ECB's ability to bring inflation back to target without derailing the economic recovery will be a key determinant of the Euro-Area's macroeconomic outlook.
Key Takeaways for Forex Traders:
Stay informed about geopolitical developments: Geopolitical events can have a significant impact on currency markets. Forex traders should closely monitor developments in Ukraine, the Middle East, and other regions that could affect the Euro-Area's economy.
Monitor fiscal policy developments: The Euro-Area's fiscal policy is in a state of flux, with the Commission's reform proposals set to come into effect in 2025. Forex traders should monitor the implementation of these reforms and assess their potential impact on the Euro-Area's economy.
Keep an eye on inflation: Inflation remains a key concern for the ECB. Forex traders should monitor inflation data closely and assess the ECB's monetary policy response.
Watch the labour market: The Euro-Area's labour market remains strong, but wage growth is putting upward pressure on inflation. Forex traders should monitor wage growth and assess its potential impact on the ECB's monetary policy decisions.
In conclusion, the Euro-Area's macroeconomic outlook is uncertain, with both opportunities and challenges. By staying informed about the key drivers of the region's economy, forex traders can make more informed trading decisions and position themselves to profit from the opportunities that arise.
Sources:
Stratfor Worldview
European Fiscal Board
GfK Group
Eurostat
European Central Bank
Trading Economics
INSEE, France
Federal Statistical Office, Germany
S&P Global
Centre for European Economic Research (ZEW)
Ministère de l'Économie et des Finances, France
Bundesagentur für Arbeit, Germany
Ifo Institute