After a tumultuous 2023, many predict the European economy is poised for a transitional year as significant impediments — high inflation and increasing interest rates — recede into the past.

Despite the eurozone’s difficult economic background, the pan-European Stoxx 600 stock index ended the year 12.6% higher on expectations of a big relaxation of monetary policy in 2024 from the US Federal Reserve and the European Central Bank.

Major market indices in Europe and around the world have had a more shaky start to 2024, as they wait for new rounds of data and signals from monetary officials.

Global markets rallied in the last two months of 2023, as bond yields fell on expectations that the Fed and ECB would start decreasing interest rates in early 2024. Despite the market’s expectation of a first cut in March, the latter has failed to hint any imminent policy easing.

Despite a year-on-year increase in the headline consumer price index to 2.9% in December, eurozone inflation is on a general downward trajectory at both the core and headline levels, having cooled more than predicted recently.

“While wage growth is still firm and the labour market remains resilient, we expect both to soften in 2024 and look for core inflation to reach 2% year-on-year in [the fourth quarter of 2024], much earlier than projected by the ECB,” Goldman Sachs Chief European Economist Jari Stehn said in note on Friday.

“As a result, we see earlier and faster policy rate cuts than implied by the Governing Council’s recent communication.”

The Wall Street behemoth expects a first rate decrease in April, followed by 25 basis point reductions at each meeting until rates reach 2.25% in early 2025, meaning six rate cuts totaling 150 basis points in 2024.

Deutsche Bank somewhat reflected this prognosis, predicting that the European economy will begin to expand in 2024 but “won’t reach its new equilibrium.”

“The direction of travel is positive. We see the economy starting the year in mild recession/broad stagnation but growing again by H2-24,” Chief Economist Mark Wall said in a research note on Friday.

“We expect inflation to decline to target rapidly as the supply shocks dissipate, and the ECB to start cutting rates quickly.”

However, the German lender highlighted that the structural consequences of the pandemic, the Russia-Ukraine war, geopolitics, climate change, and the green transition are still unpredictable in the medium and long term, limiting visibility of GDP and inflation beyond this year.

Economists at Deutsche Bank identified three major elements that will determine the path of the economy and markets: monetary transmission, the labour market, and competitiveness.

Wall stated that there are some signs that the transmission of monetary policy to domestic banks is “starting to peak,” but that other factors add ambiguity to that view.

“Whether job hoarding is strong or weak will likely determine whether the labour market is more likely to be a drag on growth or a boost to inflation — we think the former more than the latter,” Wall said.

“Competitiveness has dropped to all-time lows despite gas prices unwinding much of the invasion shock. This reveals a complex and broad-based sustainability problem.”

He stated that the 2024 elections will determine how the administration responds to this situation.

According to Barclays European equity strategists, the fourth-quarter surge in risk assets transformed European stock markets from “oversold to overbought” and moved sentiment from “depressed in October to euphoric by year end.”

“Short term, markets might benefit from some healthy consolidation, but given the broadening acceptance of a soft landing, and potential for 2024 rate cuts (more in the EU than US), as well as still cautious overall positioning, we feel the direction of travel for markets remains to the upside over 2024,” Barclays Head of European Equity Strategy Emmanuel Cau and his team said in a note Friday.

“Styles that should continue to benefit from a soft landing materialising, and consequent broadening out of equity returns, are Value and Size (Small Caps), and we maintain our Positive view towards both.”

The British lender maintains a neutral stance on quality and growth firms, which its strategists believe are costly but have the potential to profit from lower yields.

(Adapted from Forexfactory.com)

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