Governments should continue to withdraw support measures related to energy products to ensure a sustainable continuation of the deflationary process, the European Central Bank said in its latest economic bulletin published on Thursday.

Economic growth may be lower if the impact of monetary policy turns out to be stronger than expected, the authors of the report noted. A more modest development of the world economy or a further slowdown in international trade will also affect economic progress in the Eurozone.

Russia’s unjustified war in Ukraine and the tragic conflict in the Middle East are the main sources of geopolitical risk. As a result, companies and the public may become less certain about future events and international trade may be disrupted

The evolution of the economy remains modest

The evolution of the economy remains modest. Consumers continued to hold back on spending, investment slowed and corporate exports contracted, reflecting a slowdown in external demand and some losses in competitiveness. However, surveys point to a gradual recovery until 2024.

As inflation declines and wages continue to rise, real incomes will recover, supporting economic growth. In addition, the inhibitory effect of previous interest rate increases will gradually disappear, and demand for eurozone export goods should increase. The unemployment rate is at its lowest level since the introduction of the euro. Employment rose 0.3% in the fourth quarter of 2023, again outpacing the pace of economic activity. Therefore, the output per person decreased even more.

At the same time, employers are announcing job cuts, and fewer companies are reporting production cuts due to worker shortages. According to the March 2024 forecasts, economic growth is expected to gradually intensify during the current year as real disposable incomes increase on the back of lower inflation and stable wage dynamics, and the exchange rate improves.

Given that current disruptions in Red Sea shipping are unlikely to result in significant new supply constraints, export dynamics are forecast to catch up with external demand, which is expected to strengthen. In the medium term, the recovery is also believed to be supported by a gradual dissipating of the impact of the ECB’s monetary policy tightening. Overall, average annual real GDP growth is expected to be 0.6% in 2024 and to strengthen to 1.5% in 2025 and 1.6% in 2026. Compared to the macroeconomic forecasts of the Eurosystem staff in December 2023, the GDP growth forecast was revised downwards. for 2024.