"I think we're at the highest level and rates, most likely - barring additional shocks or completely unpredictable data - should not continue to rise. I think they have reached their peak," said the president of the European Central Bank, Christine Lagarde, in an interview with France 2. "If we win the battle against inflation, that is, if we have the certainty that inflation will actually be at 2%, then rates will start to come down," he added in the interview with Caroline Roux.
"The most recent data for the fourth quarter of 2023 indicate that growth is likely to remain moderate, while the labor market is expected to slow. Growth is expected to start to recover in early 2024, in the absence of further shocks," also thanks to the diminishing effects of unfavourable financing conditions. This was written by the ECB in its economic bulletin.
In addition, falling inflation should help boost real incomes, and export growth should align with improving foreign demand.
The ECB, which updated its economic forecasts last December, explains that "available short-term indicators suggest continued weakness in economic activity in the fourth quarter of 2023." The "persistent contraction in manufacturing in the fourth quarter" but also "a more marked slowdown in services, which had previously shown good resilience", weighs heavily. In addition, "the most recent survey data continue to point to a general weakness in goods spending" at the end of the year. Business investment, which increased in the third quarter of 2023, "is also expected to contract in the fourth."
Investment in the residential construction sector is also falling, for which the ECB expects a further contraction in the short term. However, the economic expansion is expected to strengthen from early 2024 onwards as real disposable income increases, supported by falling inflation, robust wage growth and resilient employment, and as export dynamics align with improvements in foreign demand." The impact of rate tightening and unfavourable credit supply conditions "continue to be passed on to the economy, impacting the outlook for near-term growth", but "these dampening effects are expected to fade" over the forecast horizon, supporting growth. According to the December 2023 Eurosystem staff projections for the euro area, GDP is projected to be 0.6% in 2023, rising to 0.8% in 2024 and reaching 1.5% in 2025 and 2026.
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