blog-img1

2024 – 2nd Half Outlook and 1st Half Review

July 2024

Approaching the midpoint of 2024, Europe finds itself at a crucial juncture in its economic journey. The continent has weathered significant challenges in recent years, from the lingering effects of the global pandemic to inflationary pressures and geopolitical tensions. Invigor Partners is pleased to present the first of our new series of biannual reports reflecting on the first half of the year and outlook for the next six months.

Access the Full Report

The complete “2024 European Economic Outlook” report, including detailed analysis of individual European economies, sector-specific insights, and strategic investment recommendations, is available exclusively to Invigor Partners’ clients and accredited investors. To request access or learn more about becoming a client, please contact us at info@invigorpartners.com

Report Summary
2nd Half Outlook

The current European economic landscape presents a mix of cautious optimism and lingering challenges. Over the last few months, the region has shown resilience in recovering from the pandemic-induced downturn and subsequent inflationary pressures. However, several factors continue to shape the economic outlook for the remainder of the year.

Economic Growth
The European economy is expected to maintain a modest growth trajectory in the second half of 2024. According to the European Commission’s Spring 2024 Economic Forecast, GDP growth in the EU is projected to reach 1.6% in 2024, with the euro area slightly behind at 1.4%. This represents a gradual improvement from the subdued growth experienced in the first half of the year. The recovery is likely to be supported by increased consumer spending as real wages continue to grow, gradual easing of supply chain disruptions, and continued implementation of the Recovery and Resilience Facility (RRF). However, potential headwinds include ongoing geopolitical tensions, particularly in Eastern Europe and the Middle East, persistent labour market tightness in some sectors, and the lagged effects of monetary tightening.

Inflation
Inflation remains a key focus for European policymakers. The European Central Bank (ECB) projects headline inflation in the euro area to decrease from 5.4% in 2023 to 2.5% in 2024. Core inflation, which excludes volatile food and energy prices, is expected to remain slightly higher but on a downward trajectory. Factors influencing the inflation outlook include easing energy prices and their pass-through effects, moderating wage growth pressures, and continued monetary policy tightening effects.

Fiscal Policy
Fiscal consolidation is likely to be a focus in the remainder of the year. The European Commission forecasts that most major euro area economies will work towards shrinking their fiscal deficits. This may lead to a contractionary fiscal stance in some countries, potentially acting as a drag on economic growth.

Monetary Policy
The ECB is expected to maintain a cautious stance in the second half of 2024. As of April 2024, the key ECB interest rates remained unchanged, with the deposit facility rate at 4.00%, the main refinancing operations rate at 4.50%, and the marginal lending facility rate at 4.75%. The Governing Council has indicated that it will continue to follow a data-dependent approach in determining the appropriate level and duration of monetary restriction. Market expectations suggest a potential start to the rate-cutting cycle in the latter part of 2024, contingent on sustained progress towards the 2% inflation target.

Labour Market
The European labour market is expected to remain relatively tight, with the EU unemployment rate projected to be around 6.0% by the end of 2024. However, there may be some easing as economic growth moderates and the effects of past monetary tightening filter through the economy.

Industry Outlook
In the second half of 2024, the transportation, technology, and consumer industries in Europe are expected to show signs of recovery and adaptation to new market realities. The transportation sector, particularly road freight, will continue to face challenges from economic uncertainties and regulatory pressures but may benefit from emerging technologies like autonomous driving to address efficiency and labour issues. The technology industry is poised for a stronger comeback, with growth driven by investments in software, cloud services, AI, and cybersecurity, while also adapting to new EU and US regulations on data protection and ethical AI practices. In the consumer sector, a mixed performance is anticipated, with luxury and automotive segments showing strength, while broader retail remains cautious. As financial pressures ease, there’s likely to be a renewed focus on sustainability and environmentally conscious spending, particularly among higher-income consumers. These trends collectively point to a period of cautious optimism and strategic adaptation across these key European industries.

1st Half Review

The first half of 2024 saw the European economy navigating a complex landscape of challenges and opportunities.

Economic Performance
Economic growth in the EU and euro area remained subdued in the first half of the year. The ECB’s economic projections in March revised down the growth outlook for 2024 to 0.6% for the euro area. This weakness was attributed to the lingering effects of high inflation on consumer purchasing power, restrictive financing conditions due to past interest rate increases, and reduced fiscal support as energy-related measures were phased out.

Inflation Developments
Inflation continued its downward trajectory, albeit at a slower pace than initially anticipated. By April, the annual inflation of the euro area had decreased to 2.4%, which was stable compared to March. Core inflation remained more persistent, reflecting ongoing domestic price pressures, particularly in the services sector.

Monetary Policy
The ECB has maintained a cautious approach since January. Interest rates were kept unchanged at the April 2024 meeting, with the Governing Council emphasising its commitment to ensuring inflation returns to the 2% medium-term target. Asset purchase programs continued to be wound down, with the Pandemic Emergency Purchase Programme (PEPP) reinvestments set to be discontinued by the end of 2024.

Financial Markets
European financial markets experienced some volatility, with short-term interest rates shifting upwards as market participants revised their expectations for ECB policy rate cuts. Sovereign bond yields initially moved lower following the ECB’s December 2023 meeting but later reversed. Euro area stock prices rose slightly but underperformed their US counterparts.

Fiscal Developments
According to the ECB’s projections, the euro area general government budget balance was expected to improve moderately in 2024, with the deficit declining from 3.2% of GDP in 2023 to 2.9% in 2024. This improvement was largely driven by the scaling back of energy-related fiscal support measures.

Transportation
The transportation sector faced significant challenges in the first half of 2024, particularly in road freight. The industry experienced turbulence due to economic uncertainties and regulatory changes, with the implementation of CO2-based tolling in multiple European countries adding to operational costs. Despite these challenges, there were signs of resilience. The contract index for freight rates fell to 127.6 points in Q1 2024, a 2.6-point drop quarter-on-quarter, while the spot index decreased to 123.9 points, down 1.1 points. These declines indicate ongoing pressure on pricing in the sector. However, emerging technologies like autonomous driving showed the potential to address labour shortages and improve operational efficiency in the long term.

Technology
Over the last six months, the technology sector has proven resilient, with investment levels nearly returning to Q1 2022 figures. European tech companies raised €29.9 billion over 970 deals in Q1 2024, almost double the amount raised in Q1 2023. This surge was partly driven by significant funding rounds in cleantech and AI. Software remained the most active subsector with 138 deals, reflecting the continued growth of generative AI solutions for enterprise and business automation. The semiconductor industry also saw increased interest, with the Solactive Semiconductors Selection PR Index gaining popularity among investors. Despite these positive trends, there was caution about potential economic headwinds that could impact investment activity later in the year.

Consumer
The consumer sector showed mixed performance in the first half of 2024, with notable strength in specific segments. The consumer discretionary sector, particularly luxury goods and the automotive industry, experienced significant growth. Consumer discretionary sector indices claimed an 18% market share of sector index thematics in Q1 2024, up from 6% in Q1 2023. This growth was largely driven by luxury goods companies and auto manufacturers. However, broader retail sentiment remained cautious. RSM UK’s consumer sentiment survey found that 96% of consumers were still concerned about the cost of living, which was only a slight improvement from the previous year. Retailers faced challenges in the first half of 2024 as consumers continued to grapple with higher prices and interest rates, leading to stagnation in sales volumes.

In the coming months, Europe will continue to face ongoing tensions with Russia, economic challenges, and the need to navigate an evolving global order. Economic indicators suggest a gradual recovery, but geopolitical uncertainties loom large. The continent’s ability to adapt to changing global dynamics, particularly in its relationships with the US, China, and Russia, will be critical. As Europe confronts multiple elections and policy challenges, its success will hinge on balancing economic pragmatism with strategic autonomy, potentially reshaping its role in the international order for years to come.

Previous post