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Europe's economic recovery strengthens as energy shocks recede: Fitch

13 Aug '24

2 min read

Europe's economic recovery strengthens as energy shocks recede: Fitch

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Developed Europe's economic recovery is gaining momentum, driven by the reversal of 2022's energy shocks.
Fitch raised its 2024 eurozone GDP growth forecast to 0.8 per cent, with the UK's growth forecast also up to 0.7 per cent.
The recovery is bolstered by rising real incomes, but political uncertainties and restrictive ECB rates remain concerns.

Developed Europe’s economic recovery prospects have strengthened, according to a new report by Fitch Ratings. The recovery is being driven by the reversal of the 2022 terms-of-trade and energy shocks, which are boosting real incomes for both companies and consumers. The interest rate cycle is showing signs of turning, although central banks remain cautious about easing too quickly.

Fitch has revised its 2024 eurozone real GDP growth forecast upward to 0.8 per cent from the previous 0.6 per cent projected in its June Global Economic Outlook. The UK’s growth forecast for 2024 has also been raised, from 0.2 per cent to 0.7 per cent. This optimism is largely attributed to lower wholesale gas prices, which have reversed much of the terms-of-trade shock, thereby boosting real incomes alongside disinflation.

The eurozone recorded a 0.3 per cent quarter-on-quarter (QoQ) GDP growth for the second consecutive quarter in Q2 2024. While Germany’s economy saw a slight contraction, Fitch believes that its energy-intensive industries are beginning to recover from the energy shock, as per the Developed Europe Quarterly Credit Brief—3Q24 report.

Fitch’s revised growth forecast for the eurozone in 2024 hinges on a strengthening in private consumption, supported by still-growing employment and real wages. Additionally, there is potential for the household savings rate to normalise. The agency also revised its asset performance outlook for EMEA auto, unsecured consumer loans, and credit card asset-backed securities (ABS) from ‘deteriorating’ to ‘neutral’ in June. However, competition and a shift in consumer spending towards services and experiences are limiting the benefits for consumer products companies.

While the impact of earlier monetary tightening is fading, it continues to weigh on some weaker borrowers. The European Central Bank (ECB) has emphasised that interest rates will remain ‘restrictive’ for the time being. Collateralised loan obligation (CLO) demand has supported strong leveraged loan issuance, and declining ECB rates should provide some relief for floating-rate leveraged borrowers. However, primary-market pricing is expected to remain higher than legacy coupons, delaying the refinancing of high-yield bonds with fixed coupons.

Fiscal policy is now in focus as European governments aim to reduce budget deficits. However, political uncertainties, such as France’s snap elections, remain a potential source of risk, Fitch warned.

Fibre2Fashion News Desk (DP)

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