2024 economic outlook for Europe: turning macro lemons into lemonade

By Ann-Katrin Petersen, CFA, Senior Investment Strategist, BlackRock Investment Institute

The new regime of higher inflation, tight monetary policy and muted growth, which has taken hold in developed markets since the pandemic, is not going away in 2024. What does this all mean for European investors looking to navigate volatile markets and global uncertainty? While the European economy will not escape this less-than-rosy background, it has qualities which may attract investors. On the macro level, we expect falling inflation and improving fiscal prospects. Moreover, Europe can be well-placed to harness the opportunities presented by mega forces like the low-carbon transition and the ongoing rewiring of global trade.

As last year’s energy shock unwinds and some pandemic-induced supply challenges wane, we expect that headline inflation will reach – or even temporarily undershoot – the European Central Bank’s (ECB) 2% target. This may bring much-awaited relief to millions of Europeans and their real incomes that have been hit by the cost-of-living crisis, potentially stimulating consumption. The ECB will likely take a less restrictive stance after a series of historically sharp rate hikes which have already dampened growth.

Yet those hoping to return to the old regime characterised by stable growth and inflation should buckle up for a bumpy ride ahead. Despite some signs of normalisation, we think the euro area and other advanced economies may continue to face structurally lower growth, hampered by persistent underlying inflation pressures and higher interest rates than before the pandemic. Even as interest rates come down, tighter fiscal policy – mainly in the form of lower government spending – will weigh on growth. And while inflation is being pulled down by energy and goods prices, given the pace with which wages are rising, it could rollercoaster back up once energy and goods prices have finished adjusting. That’s why we think the ECB will have to remain vigilant as it cuts – it needs to see wage pressures coming down.

Tighter fiscal policy may weigh on growth, but it would improve Europe’s fiscal outlook compared to 2023. European Union (EU) leaders recently reached an agreement to amend EU budgetary rules and put an end to Member States’ pandemic-era “whatever it takes” public spending. The Stability and Growth Pact, suspended amid the pandemic turmoil, comes back into force, placing Europe on the road to fiscal consolidation.

What does it mean for investors seeking opportunities across the European economy? We expect slower nominal euro area GDP growth in 2024, but not an absence of potential investment opportunities. We believe investors could still make lemonade out of the arguably still sour macro lemons likely to be served in the coming months. We believe that macro volatility could lead to persistent dispersion of returns at securities, sector and country levels. That means rewards are on offer for investors that take a more active approach to their portfolios and get granular with asset allocation.

An additional way to drive portfolio outcomes in this context is by harnessing mega forces – major structural changes which are poised to create shifts in profitability across economies. We anticipate that two of them in particular could amplify each other on the continent: the low-carbon transition and geopolitical fragmentation.

The Ukraine war was a brutal wake-up call for Europe to address energy security. European leaders have been taking action, securing more diversified energy sources in a relatively short time. In the longer run, Europe’s low-carbon transition and the ensuing build-out of new energy infrastructure¹ are poised to accelerate noticeably, with the potential to generate massive capital reallocation. The EU’s Green Deal Industrial Plan complements various ongoing transition initiatives and will help strengthen the region’s competitiveness as a green investment destination.²

Despite the anxiety fuelled by geopolitical fragmentation, Europe has demonstrated resilience³ and pragmatism. The continent has been adapting to this new reality, leveraging its position as the largest trading block in the world to expand its trade partnerships and reduce critical dependencies.

What is more, even in the challenging environment of tighter financing conditions and higher production costs, European companies are regaining some of their appeal for investors: growth in European corporate earnings is expected to accelerate to mid-single digits in 2024 compared to at best stagnating profit growth expectations in 2023.⁴ Additionally, European companies command attractive share price valuations both historically and relative to their US peers.⁵ Selectivity will remain key as European companies adapt to this geo-economic reality.

Disclaimer

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of [DATE] and may change as subsequent conditions vary.