Azad Zangana, senior European economist & strategist at Schroders predicts that the European Central Bank (ECB) will begin to cut rates first during the June meeting, followed by three more reductions of 25 basis points each by the end of the year.
After a brief technical recession in the second half of 2023, the European Zone returned to growth in the first quarter of the year. “Real GDP increased by 0.3% compared to the previous quarter, with growth also recovering in Germany. Italy (0.3%) and Spain (0.7%) both exceeded consensus expectations, and France (0.2%) also saw a slight improvement,” explained Zangana.
According to the manager's view, the outlook for the European Zone remains largely unchanged: “The combination of lower inflation and monetary policy easing should support a recovery in demand. However," added Zangana, "the structural shift towards higher domestic energy and labor costs suggests that Europe will benefit less from a recovery in global trade than in the past."
However, Schroders believes that the economies of the countries of the European Zone can positively surprise the market. “Our estimate for European Zone GDP growth has been revised upwards from 0.7% to 0.9% for 2024 and remains unchanged for 2025 at 1.8%. These are more optimistic forecasts than the consensus, which is 0.6% and 1.4%, respectively.”
Inflation proved more sticky than analysts expected, "largely due to the impact of energy prices, as the government has reduced energy subsidies and geopolitical events in the Middle East have pushed up oil prices," Zangana said.
Overall, inflation eased to 2.4% year-on-year in April from 2.8% three months earlier. “We have raised our inflation estimate from 2.1% to 2.3% for 2024. Although the drop in gas prices has caused us to reduce our forecast for 2025 to 2.4% from 2.8% previously. It should be noted that our forecast is higher than the consensus estimate of 1.9%,”
Based on these figures, Schroders expects that, after four reductions in 2024, "the ECB will make two more reductions of 25 basis points in the first quarter of next year, and then return to stability throughout 2025. This pause may be driven by the re-emergence of inflationary pressures, Zangana added.
