Medium-term outlook for euro area remains challenging: IMF

Euro area growth is picking up, albeit from a low rate. In 2024, increasing real wages and some drawdown of household savings are expected to contribute to a consumption-led recovery, the IMF said in its concluding statement of the 2024 mission on common policies for member countries.

In 2025, easing financing conditions are projected to support a recovery in investment in the euro area, while healthy employment and nominal wage growth continue to support consumption.

In the medium term, however, growth is expected to be held down by population aging and low productivity growth.

Inflation is projected to return to target in the second half of 2025. The 2022-23 monetary policy tightening is helping to bring down inflation and will continue to do so for some time to come, the IMF statement said.

Past declines in commodity prices are also contributing to the reduction in headline inflation in the zone.

Risks to growth are on the downside while they are two-sided for inflation. Past monetary policy tightening could put a stronger drag on output than expected. Growth can also be lower due to adverse external developments, such as intensifying geopolitical tensions or weaker global demand, the IMF noted.

Moreover, consumption growth may not pick up as envisaged if labour markets cool, hurting consumer sentiment. These factors could also drag inflation below the baseline.

“Europe’s economy is hamstrung by low productivity growth, which will be increasingly problematic for the growth of living standards as adverse demographic trends intensify. Insufficient private and public investment, low R&D expenditure in digital technologies, administrative barriers to entry of firms and rigid labour markets are all contributing factors,” the statement said.

“Without further financial market integration and deepening, Europe will not only fall short of its transformative goals of energy security, climate change mitigation and digital transition but also risk falling behind global peers,” it noted.

The European Union should enhance its budget to lift and better target public investment and prioritise strengthening the single market while avoiding distortive industrial and trade policies, it added.

Fibre2Fashion News Desk (DS)