In the third quarter of 2023, the euro area economy showed a slight contraction. Despite this phase of weakness, one is expected gradual recovery from the beginning of 2024, driven by rising real incomes, reduced inflation and a robust labor market. The prospect is of an overall improvement, with more favorable financial conditions and growing foreign demand.
This is what we read in the last one economic bulletin of the ECB which sees a light at the beginning of 2024: in the absence of further shocks, a new chapter of expansion could begin. Mirroring the statements by Christine Lagarde, the bulletin confirms that, despite a recent decline in inflation, the Central Bank warns of its potential rise in the short term. At the moment, no rate cuts are planned, but the ECB remains ready to adapt its strategy to changing economic conditions.
Economic activity
In the third quarter of 2023, the euro area economy experienced a slight contraction, mainly due to a decrease in inventories. The most restrictive financing conditions are one modest foreign demand continue to put pressure on economic activity in the short term, especially in key sectors such as manufacturing and construction. In the sector of services, a slowdown is expected in the coming months, influenced by weak industrial activity and tighter financial conditions.
Despite such challenges, the job market remains a strength, with an unemployment rate of 6,5% in October and job growth of 0,2% in the third quarter. However, the demand for labor is slowing down, highlighted by the decline in job vacancy announcements by companies.
Inflation below target
Despite a recent decline ininflation, the ECB underlined the prospect of a probable temporary increase in the short term. However, macroeconomic projections outline a progressive reduction in inflation during 2024, reaching 2,7%, approaching the target of 2% in 2025 (2,1%) and 1,9% in 2026. This it is attributed to the decline in energy inflation, the impact of restrictive monetary policy, the progressive easing of inflationary pressures and restrictions offered, together with the maintenance of anchored long-term inflation expectations.
Macroeconomic prospects
Eurosystem experts have outlined a framework of limited economic growth in the short term, with a recovery forecast in the medium term. Past decisions, such as interest rate increases, continue to have an impact, helping to temporarily dampen demand. However, growth is expected to gradually increase from 0,6% in 2023 to 1,5% in both 2025 and 2026.
Risks and tensions
The Council highlighted downside risks to economic growth, including possible stronger effects of monetary policy than expected. Geopolitical tensions e extreme weather phenomena have been identified as significant sources of risk, potentially influencing business and household confidence.
Banks doing well, but fragile prospects
Le banks euro area countries have demonstrated a solid financial position, highlighted by high capital ratios and significant improvements in profitability over the past year. However, the prospects for the financial stability appear fragile in a context characterized by more restrictive financing conditions, weak growth and geopolitical tensions. A potential worsening could occur if banks' funding costs rise beyond expectations and if an increasing number of borrowers face difficulties in repaying loans.
The analysis of the financial markets highlights a decline in government bond yields and bonds banking, with an almost unchanged differential. The 10-year BTP rates recorded a sharp decrease, in response to the announcements of the rating agencies which confirmed the assessment of the Italian public debt.
