The eurozone has managed to bounce back from its shallow technical recession, thanks to a stronger-than-expected performance by its "big four" economies in the first quarter of 2024. According to figures released by Eurostat, the European Commission's statistical agency, the 20 nations that use the single currency posted a 0.3% growth between January and March, surpassing financial market expectations of 0.2%.
This rebound follows two successive quarters of 0.1% contraction in the second half of 2023, marking the eurozone's best growth performance since the third quarter of 2022. The recovery has been attributed to lower energy prices, falling inflation, rising real wages, and the prospect of interest rate cuts, which have helped boost activity after a downbeat 2023 in which the eurozone only grew in one quarter.
Among the eurozone's largest economies, Germany and France both grew by 0.2%, while Italy and Spain posted growth of 0.3% and 0.7%, respectively. However, Germany's performance in the final three months of 2023 was worse than initially thought, with the economy contracting by 0.5% instead of the previously reported 0.3%.
Smaller eurozone economies also contributed to the overall growth, with Ireland expanding by 1.1% and Latvia, Lithuania, and Hungary each growing by 0.8% in the first three months of 2024.
In addition to the positive growth figures, separate Eurostat data showed that headline eurozone inflation remained unchanged in April at 2.4%, while core inflation, which excludes energy and food, decreased from 2.9% to 2.7%. This development has increased market expectations for the European Central Bank (ECB) to start cutting interest rates at its next monetary policy meeting on June 6.
Money market pricing currently indicates a nearly 70% probability of a June rate cut, according to LSEG data, with even higher bets on a reduction in July or September. Several voting ECB members have expressed their anticipation of an interest rate decrease in June, citing the need to prevent an excessive slowdown in the eurozone economy and flagging risks from oil prices and volatility in the Middle East.
Gerardo Martinez, Europe economist at BNP Paribas, noted that the fall in services inflation for the first time in six months "increases our confidence that the ECB will lower policy rates in June." However, he also pointed out the slightly lower-than-expected fall in core inflation and volatility in some areas of services that had increased the inflation rates in France and Italy.
"With the path from here likely to be bumpy and growth data showing that the eurozone economy is gathering momentum, we think the path beyond June remains more uncertain and we continue to expect a gradual and cautious (quarterly) pace of easing from the ECB," Martinez added.
Jane Foley, head of FX strategy at Rabobank, told CNBC that while the growth figures were encouraging, the firmer-than-expected core inflation "may suggest less urgent need for more accommodative monetary policy from the ECB." She emphasized that while many market participants consider a June rate cut to be almost a done deal, there is still plenty of room for debate about the pace of ECB policy moves later in the year.
