This Week’s Developments in the Global Economy

Considering the Outlook for Growth in the Eurozone

Following the European Central Bank’s (“ECB”) third interest rate cut at this week’s policy meeting, the outlook for growth for the Eurozone and the US appear to have different trajectories. While the inflation in the Eurozone has decreased meaningfully, structural factors and the effects of tight monetary policy may limit the potential for sustained economic growth. In 2023, Euro Area GDP per capita reached $44K, reflecting a mere 4% increase over the past two years. In comparison, the US recorded $82K per capita, reflecting a 15% increase during the same period. While both economies remain in positive territory despite years of persistent high inflation, expectations for recovery and expansion vary meaningfully.

The Eurozone’s Progress of Inflation

In September 2024, Eurozone headline inflation fell to 1.7%, 30 bps below the ECB’s target rate of 2%. During their June, September, and October meetings, the ECB reduced the main refinancing rate by 25 bps, 60 bps, and 25 bps, respectively, totaling a cumulative reduction of 110 basis points thus far. While the region has made meaningful progress in addressing inflation, the 310 bps decrease in energy inflation was the primary driver for the decline in headline inflation. However, categories such as services, currently standing at 3.9% and accounting for about 45% of headline inflation, continue to exert upward pressure on prices. Moreover, core inflation, which excludes the more volatile energy and food prices, remains above the target at 2.7% year-over-year. In the US, both headline and core inflation also remain above target. However, there are methodological differences between the US and Eurozone inflation measures, complicating direct comparisons on inflation between the two regions.

US and Eurozone Economic Growth on Somewhat Diverging Paths

Market observers are optimistic about the potential for additional rate cuts from the ECB, anticipating reductions at every upcoming meeting through mid-2025. This confidence may stem from the progress made in combating inflation across Eurozone countries, as well as a growing apprehension regarding the region's lackluster growth. While the ECB has signaled that a recession is not expected in the Eurozone, it is important to note that US growth figures have substantially surpassed those of the Eurozone in recent quarters, with the average US quarter-over-quarter seasonally adjusted annual growth rate being 242 basis points higher than that of the Eurozone since the beginning of 2023.

The Eurozone Outlook Moving Forward

Some market participants are optimistic about the Eurozone's economic outlook, with expectations that consumer activity will support growth in the region. Consumer confidence indicators, especially those concerning future savings capacity, have shown signs of improvement. This uptick is reflected in an increased household savings rate. The interplay of increased available funds and lower interest rates—which are likely to promote consumption—are critical factors to consider, particularly in considering the relative trajectories of growth globally.