• Headline and core inflation will continue to trend down this year and next, allowing the ECB to cut interest rates a little more quickly than is discounted in the markets.
• Real household incomes look set to keep rising strongly (see Chart 1), supporting consumer spending. And after a difficult year for exporters in 2023, the surveys show an improvement in export orders recently. This is at least partly due to a pick-up in foreign demand. So exports should post decent rates of expansion in 2024 and beyond.
• Nevertheless, we think that euro-zone GDP will underperform the consensus forecasts over the coming years. Surveys suggest that investment across the region will remain subdued, and we expect a decline in Italy’s booming construction sector later in 2024.
• What’s more, looser monetary policy will do little to boost GDP growth. Policy rates will fall only gradually and remain a lot higher than before Covid. And cuts are discounted in the markets, so they are already reflected in the interest rates charged by banks. This suggests that lending rates won’t fall far. (See Chart 2.)

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• Tighter fiscal policy will weigh on GDP growth too. (See Chart 3.)
• By 2026, the economy should return to its trend rate of growth, which we think is slower than many assume. (See Chart 4.) Cumulatively, our forecasts imply that euro-zone GDP will grow by 1% less than the consensus expects by the end of 2026.

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• Even so, the labour market remains tight (see Chart 5) and official measures of wage growth were surprisingly high in Q1. Timelier data point to a slowdown in Q2, suggesting that wage-sensitive services inflation will continue to decline, albeit gradually. (See Chart 6.) Core goods inflation will probably fall a little further too in the coming months.

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• To borrow the ECB’s phrase, the headline inflation rate will be “bumpy” in the coming quarters due to movements in energy and food inflation. But we think that it will be close to 2% in 2025 as a whole. And if oil and natural gas prices decline as we expect, energy inflation will be negative and drag the headline rate below the target in the second half of 2025 and into 2026. (See Chart 7.)
• We’ve pencilled in one 25bp cut per quarter until the deposit rate reaches 2.5% in September 2025. That’s very close to what is priced into the market, but slightly fewer cuts than expected by the consensus among economists. (See Chart 8.) The Bank will continue to shrink its balance sheet and it wouldn’t be surprising if policymakers brought forward their plans to accelerate QT.