Sluggish Productivity and High Labor Costs Threaten Eurozone Economic Outlook: S&P Report
Global credit rating agency S&P has raised concerns over the eurozone's economic performance in its latest economic outlook, citing uncertainties stemming from sluggish productivity and elevated labour costs. Despite previous expectations, the forecast for the eurozone's GDP growth has been revised downward to 0.7% for the current year, reflecting weaker-than-anticipated growth prospects.
S&P's chief EMEA economist, Sylvain Broyer, highlighted the persistent challenge of low productivity within the eurozone, which has remained virtually stagnant for years, adversely affecting economic output, employment, and wages. This worrisome trend casts doubt on the strength of the economic rebound beyond 2024.
Furthermore, the delayed implementation of the Next Generation EU recovery plan, designed to bolster the green and digital transition through public investment and reforms, has hindered public spending, exacerbating economic concerns. Projects lagging behind schedule represent a significant gap in economic stimulus, amounting to €127 billion, or 0.7% of 2023 EU GDP.
The agency's revised GDP forecast projects a modest growth rate of 1.3% for 2025 and 2026, down from previous expectations, reflecting the adverse impact of stagnant productivity and delays in the recovery plan's execution.
In addition to economic challenges, S&P anticipates adjustments in monetary policy by the European Central Bank (ECB), driven by evolving inflation dynamics. While short-term inflation forecasts have been adjusted downward to 2.6% for 2024, concerns persist over the potential long-term impact of high wage growth and sluggish productivity on inflationary pressures.
Looking ahead, Broyer predicts three rate cuts by the ECB in 2024, with the possibility of fewer cuts in 2025. However, uncertainties surrounding inflation and productivity trends continue to challenge monetary policy decisions.
The report also delves into the economic outlook for Germany, the eurozone's largest economy, which is projected to experience a gradual recovery from recession, with GDP growth estimated at 0.3% for the current year. Despite signs of improvement in the manufacturing sector, Germany faces long-term challenges, including a shrinking working-age population and heightened competition from China.
Moreover, S&P underscores the influence of geopolitical factors and labour market dynamics on the eurozone's economic trajectory. Geopolitical tensions and upcoming elections pose significant risks, while labour market conditions may exacerbate unemployment rates beyond current levels.
Overall, S&P's economic outlook underscores the eurozone's multifaceted challenges, emphasising the critical need for policy measures to address productivity constraints, labour market dynamics, and geopolitical uncertainties to support sustained economic recovery and growth.