Eurosystem staff macroeconomic projections for the euro area, June 2024 (2024)

The euro area economy recovered at the start of 2024 by more than expected in the March 2024 ECB staff projections, with a boost from net trade and rising household spending. Incoming information suggests continued growth in the short run, at a higher pace than previously foreseen. Real disposable income should continue to increase, amid robust wage growth, gradually increasing confidence and improving terms of trade, giving rise to a consumption-driven recovery in the course of 2024. The boost from net trade at the start of the year partly reflects volatility following a temporary decline at the end of 2023. However, foreign demand is expected to continue to expand, supporting euro area export growth. Over the medium term, the negative impact of the past monetary policy tightening is seen to gradually fade, with activity supported by an assumed easing of financing conditions in line with market expectations for the future path of interest rates. Growth will also benefit from a resilient labour market, with the unemployment rate declining to historically low levels later on in the projection horizon. As some of the cyclical factors that have lowered productivity growth in the recent past unwind, productivity is expected to pick up over the projection horizon. Overall, annual average real GDP growth is expected to be 0.9% in 2024, and to strengthen to 1.4% in 2025 and 1.6% in 2026. Compared with the March 2024 projections, the outlook for GDP growth has been revised up for 2024, owing to the positive surprise at the start of the year and improved incoming information. The GDP growth outlook has been revised down marginally for 2025 and remains unchanged for 2026.^[1]

Headline inflation is projected to move broadly sideways in the near term, before moderating further to levels close to target in the course of 2025. This reflects an easing of cost pressures, including from the labour side, and the lagged impact of past monetary policy tightening gradually feeding through to consumer prices. Headline inflation as measured by the Harmonised Index of Consumer Prices (HICP) is expected to show some volatility over the remainder of 2024 owing to base effects and higher energy commodity prices. Over the medium term, energy inflation should settle at low positive rates, given market expectations for the future paths of oil and gas prices and planned climate change-related fiscal measures. Recent quarters have seen food price inflation decline strongly, as pipeline pressures have eased with lower energy and food commodity prices. Looking ahead, food price inflation is expected to fluctuate around its current levels before moderating further from the end of 2025. HICP inflation excluding energy and food (HICPX) should remain above headline inflation for most of the projection horizon but is expected to continue its disinflationary path, although at a slow pace and mainly in 2025 and 2026. A central element in this projection is the expected gradual easing of nominal wage growth from initially still elevated levels as upward impacts from inflation compensation pressures in a tight labour market fade. The expected recovery in productivity growth should support the moderation in labour cost pressures. Moreover, profit growth is set to weaken and partially buffer the pass-through of labour costs to prices, especially in 2024. Overall, annual average headline HICP inflation is expected to decline from 5.4% in 2023 to 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. Compared with the March 2024 projections, HICP inflation has been revised up by 0.2 percentage points in 2024 and 2025. This is mainly due to higher energy commodity prices and slightly higher than expected incoming data for HICPX inflation. In addition, labour cost pressures are expected to be somewhat stronger on account of higher wage growth coupled with a slightly more cautious outlook for productivity growth. The outlook for both headline inflation and HICPX inflation for 2026 is unrevised.

Global activity shows signs of improvement, although headwinds to growth remain. Incoming data on global activity (excluding the euro area) confirm a very gradual improvement since the beginning of the year, with hard data aligning increasingly with the positive signal coming from soft data.^[2] However, headwinds to global growth remain, including gradually cooling labour markets, further moderation in nominal wage growth and diminished excess savings in advanced economies. Past monetary policy tightening and elevated economic uncertainty amid geopolitical tensions are also still dampening growth. In China, consumer spending remains weak against the backdrop of a troubled residential real estate sector, whereas manufacturing activity and exports continue to drive economic growth. The outlook for global growth is broadly unchanged from the March 2024 projections; growth of 3.3% is expected in 2024 and 2025, with 3.2% in 2026 – slightly below the pace observed over the last decade (Table 2).

Global trade (excluding the euro area) is projected to recover this year and to grow more in line with global activity thereafter. Following a period of weak trade dynamics in 2023, with the post-pandemic rebalancing of demand from goods to services, incoming data confirm that the recovery in global trade is continuing unabated and the impact of traffic disruptions in the Red Sea area remains contained. Global imports are projected to increase by 2.6% in 2024, before rising to 3.3% in 2025 and 2026 – little changed compared with previous projections. The recovery in euro area foreign demand this year is expected to be less dynamic, at 2.1%. This largely reflects weaker imports in some of the euro area’s main trading partners – such as the United Kingdom and central and eastern European countries – in the second half of 2023 and in the first quarter of 2024. As its quarterly growth dynamics over the projection horizon are comparable with those of world imports, euro area foreign demand is expected to increase by 3.4% in 2025 and by 3.3% in 2026.

Inflation at the global level is projected to decline over the projection horizon. Headline consumer price index (CPI) inflation aggregated across major advanced and emerging market economies is expected to decline to 4.2% in 2024, 3.3% in 2025 and 2.9% in 2026, on account of the fading impacts of past supply shocks and restrictive monetary policy. While this outlook is broadly comparable with the March projections, inflation in the United States has been revised slightly upwards for this year owing to stronger than previously expected outturns in the first quarter. In China, headline CPI inflation remains subdued against the backdrop of sluggish domestic demand and is projected to increase gradually over the projection horizon. Growth in euro area competitor export prices, in national currency and annual terms, is expected to turn positive this year and to remain close to its estimated long-term average over the rest of the projection horizon. A downward revision for 2024 compared with the March projections reflects weaker than previously expected export price inflation outturns, outweighing the impact of higher commodity price assumptions in the current projection round.

Economic activity in the euro area recovered in the first quarter of 2024, partly driven by temporary factors (Chart 1).^[3] Eurostat’s flash estimate of quarterly growth in the first quarter of this year was 0.3%. This was 0.2 percentage points higher than expected in the March projections, while the figure for the fourth quarter of 2023 was revised down by 0.1 percentage points. The positive surprise in the first quarter was likely related to a boost from net trade, following a temporary decline in the fourth quarter of 2023. The unusually mild winter also temporarily supported housing investment in some countries. Across sectors, value added in industry likely contracted in the first quarter of 2024, while value added in services expanded.

Chart 1

Euro area real GDP growth

(quarter-on-quarter percentage changes, seasonally and working day-adjusted quarterly data)

Real GDP is expected to strengthen further during 2024, supported by increasing household incomes, foreign demand and some recovery in business investment. The continued growth in real disposable income is expected to support private consumption, which should become the main driver of growth from the second quarter onwards. Developments in monthly indicators – such as gradually increasing consumer confidence, further strengthening in the Purchasing Managers’ Index indicators for services activity and new orders to May and the March increase in retail sales volumes – are consistent with such a recovery in household spending. Robust real wage growth, in the context of a tight labour market, should underpin households’ purchasing power throughout the year, supported by an expected recovery in confidence. Business investment is projected to broadly stagnate in average annual terms in 2024, with some recovery being observed during the year, mostly reflecting the waning but still present drag from past monetary policy tightening. At the same time, it will be supported by the recovery in domestic and foreign demand, with foreign demand also lifting export growth. The normalisation of the inventory cycle is also projected to yield a neutral contribution to growth in the second half of 2024, after a significant negative contribution at the turn of the year. Finally, the short-term outlook for euro area real GDP growth is expected to be boosted considerably by the impact of the activities of multinational enterprises in Ireland, following negative impacts during 2023.

Over the medium term, real GDP growth will be supported by rising real incomes, strengthening foreign demand and the waning impact of monetary policy tightening. The peak impact of monetary policy tightening is expected in 2024, despite market expectations of a reduction in interest rates. The withdrawal of fiscal support measures introduced since 2022 to compensate for high inflation and energy prices will, overall, have a small negative impact on growth in 2024-26. At the same time, government consumption and investment will contribute positively to GDP growth.

Financing conditions, especially high levels of interest rates, are expected to continue to have a strong negative impact on growth, but this will fade over the projection horizon. The impact of the monetary policy measures taken since December 2021 continues to feed through to the real economy, affecting the growth outlook, particularly for 2024.^[4] On the basis of market expectations regarding the future path of interest rates (Box 1), the negative impact of monetary policy on economic growth is expected to start fading gradually during 2024. These effects, together with the fading of the negative impact from the observed tightening in credit standards since the end of 2022, will support the economic recovery.

Compared with the March 2024 projections, real GDP growth has been revised up 0.3 percentage points for 2024, down by 0.1 percentage points for 2025 and remained unrevised for 2026 (Table 3 and Chart 2). The revisions for 2024 reflect the positive surprise in the first quarter of the year driven by net trade and the improvement in some forward-looking survey indicators, offsetting somewhat more negative carry-over effects from lower growth in the fourth quarter of 2023. The marginal downward revision for 2025 mainly relates to a downward revision to government consumption in light of a tighter fiscal policy stance.

Chart 2

Euro area real GDP growth – decomposition into the main expenditure components

a) June 2024 staff projections	b) Revisions vs the March 2024 staff projections
(annual percentage changes, percentage point contributions)	(revisions: percentage points and percentage point contributions)

Turning to the components of real GDP, real private consumption is expected to be the main driver of economic growth, supported by robust growth in real incomes on the back of rising wages and falling inflation, despite a relatively high saving ratio. Private consumption should recover gradually in the course of 2024 and grow at annual rates of 1.6-1.7% in 2025-26, markedly above the pre-pandemic average of 1.2%. This recovery is driven by rising real disposable income, mainly from strong wage growth and robust non-labour income (i.e. income from self-employment and from financial assets). In the near term, the saving ratio will remain relatively high in line with high frequency soft data on future saving intentions, still heightened but declining economic uncertainty, high interest rates and tighter credit access. Moreover, the saving ratio will continue to be supported by the typically low propensity to consume out of non-labour income. In the medium term, growth in real incomes is expected to moderate as the catch-up in real wages gradually slows but this should be largely offset by a decline in the saving ratio. As uncertainty and inflationary pressures are expected to recede further and consumer spending behaviour to normalise gradually, the saving ratio should start to edge down from the end of 2024. However, it is projected to remain above its pre-pandemic average over the projection horizon, as higher interest rates are likely to keep providing incentives for households to save. In addition, wealth effects are also expected to support the recovery of private consumption.

Housing investment is projected to decline further during 2024, before slowly recovering in the course of 2025 as the negative effects of the tightening of financing conditions gradually ease and household incomes continue to rise robustly. After three consecutive quarters of decline, housing investment is likely to have picked up in the first quarter of 2024, supported by the unusually mild winter, particularly in Germany. As this special effect is fading and demand for housing remains weak (exacerbated by a significant fiscal incentive expiring in Italy), housing investment is expected to resume its downward trend in the second quarter of 2024. However, with the fading impact of past rises in mortgage lending rates, a recovery in house prices and the robust rise in household incomes, housing investment is projected to start recovering as of mid-2025. Overall, following a further significant fall in 2024 and a slight decline in 2025, housing investment is likely to increase on an annual basis in 2026, for the first time since 2022.

Business investment is projected to recover in the coming quarters, amid improving demand, the fading drag from adverse financing conditions, crowding-in effects from the Next Generation EU (NGEU) programme funds and increasing green and digital investment. Euro area business investment (excluding volatile Irish intellectual property products) contracted strongly in the second half of 2023, with declining confidence, the winding-down of previous order backlogs, lower internal financing buffers and tighter financing conditions. A recovery is projected from the beginning of 2024, in line with expectations of strengthening domestic and foreign demand. Crowding-in effects from the NGEU programme funds (which, in some countries, have been postponed towards the end of the projection horizon) and ongoing private sector efforts to enhance green and digital investment will contribute to the recovery, as will the fading drag from adverse financing conditions.

After a period of negative growth, euro area trade is expected to improve as exports grow with foreign demand. Euro area real exports are estimated to have rebounded in the first quarter of 2024 and by more than expected in the March projections. Over the projection horizon real exports are expected to grow broadly in line with developments in foreign demand. Compared with the March projections, the export market share has been revised down over the projection horizon and is expected to remain well below pre-pandemic levels. This is due to the competitiveness challenges related to the past appreciation of the euro and to the past energy shocks, since the euro area is more affected by higher energy commodity prices than its trading partners. Imports are projected to recover slightly faster than domestic demand as the trade-intensive components of demand, such as investment, recover. Overall, net trade is expected to have a neutral contribution to growth over the projection horizon. The terms of trade are projected to improve only slightly over the projection horizon given that the effect of the energy shock has mostly worked its way through. From 2024, the current account balance is projected to recover further, to levels just below 3% of GDP but slightly above its pre-pandemic average (2.6%).

The labour market is seen to remain resilient, although the pace of growth in employment should slow in comparison with recent years. Employment grew by 0.3% in the first quarter of 2024 according to Eurostat’s flash estimate, again surprising to the upside (in the March projections employment was expected to remain stable). Growth in employment is expected to decline from 1.4% in 2023 to 0.8% in 2024 and to stabilise at 0.4% and 0.5% in 2025 and 2026 respectively. The current level of employment is above the level implied by a dynamic Okun’s law. However, it is projected to converge to the level implied by the Okun’s law relationship during 2026 (Chart 3, panel a). This pattern reflects that cyclical factors (such as labour hoarding and high profit levels of firms) that have supported employment more than usual over the recent past are expected to gradually fade away.^[5] Employment growth has been revised up by a cumulative 0.5 percentage points in 2024-26 compared with the March projections. This increase reflects the upward surprise in early 2024 and a somewhat improved outlook for labour force developments on account of recent positive data.

Chart 3

Employment and productivity

a) Employment	b) Productivity (in terms of heads)
(index: Q4 2019 = 100)	(index: Q4 2019 =100)

Labour productivity growth is expected to strengthen over the projection horizon, but productivity levels in 2026 are seen to remain significantly below the long-term linear trend. Stronger growth in employment, in an environment of relatively muted real GDP growth, has recently left growth in productivity subdued. Over the projection horizon, productivity is expected to recover, following a slightly downward revised path compared with the March projections. While productivity growth of 1.0% in 2025 and 1.1% in 2026 seems relatively strong – nearly double the historical average (2000-19) – it should be seen against the especially low annual average growth of -0.1% since the pandemic (2020-23). This is also mirrored in the level of productivity, which remains significantly below what would have been implied by historical trend growth, using the pre-pandemic average annual growth rate of 0.6% as a benchmark (Chart 3, panel b).

The unemployment rate is expected to remain relatively stable until the end of 2025 and then to fall further to a new historical low in 2026 (Chart 4). It is expected to hover around 6.5% in 2024 and 2025 and to decline to 6.3% in 2026, an all-time low. The unemployment rate has been revised down by 0.2 percentage points, on average over the projection horizon, partly on account of recent data being more positive and a somewhat more robust employment outlook.

Chart 4

Unemployment rate

(percentage of labour force)

The euro area fiscal stance is expected to tighten over the projection horizon, particularly in 2024 (Table 4).^[6] A downward surprise in the 2023 budget outcome is explained mainly by a loosening of the fiscal stance by 0.3 percentage points of GDP compared with the estimates in the March 2024 projections, largely on account of higher than expected expenditure growth. In 2024 the fiscal stance is projected to tighten significantly, owing mainly to the withdrawal of a large part of the energy and inflation support measures. A further tightening of the fiscal stance, albeit at a much slower pace, is projected for 2025-26, on the back of a further scaling down of the remaining energy support in 2025, slower growth in subsidies and other fiscal transfers, and some measures on the revenue side. These effects are expected to be partly compensated by limited increases in government investment. In addition to these discretionary fiscal policy measures, non-discretionary factors – including revenue windfalls/shortfalls – are expected to have a relatively limited impact on the stance over the projection horizon, after large swings in recent years. Relative to the March 2024 projections, the euro area fiscal stance entails somewhat more tightening over 2025-26, mainly on account of less dynamic expenditure growth, which in part reflects the temporary nature of the 2023 fiscal slippage.

The euro area budget balance is set to improve over the projection horizon, while the debt ratio is projected to broadly stabilise. After the larger than expected outcome for 2023, the euro area deficit is projected to decline, falling below the 3% of GDP reference value as of 2025. This is mainly due to a decrease in the cyclically adjusted primary deficit over the whole projection horizon, and particularly in 2024, which is expected to outweigh the increase in interest payments. Compared with the March 2024 projections, the budget balance has been revised down for 2024 (i.e. a larger deficit is expected), mainly reflecting the base effects from 2023. However, the 2026 budget balance is expected to turn out somewhat above the March projections (i.e. to show a smaller deficit), reflecting an upward revision in the cyclically adjusted primary balance and a better cyclical component. The euro area debt-to-GDP ratio is seen to broadly stabilise over the projection horizon as continuous (though declining) primary deficits and positive deficit-debt adjustments are compensated by favourable (negative) interest rate-growth differentials. Compared with the March 2024 projections, the debt ratio is slightly lower for 2024, with the unfavourable base effect from 2023 more than compensated by a significantly more favourable interest rate-growth differential owing to upward revisions in nominal GDP growth. The debt-to-GDP ratio has been revised down slightly for 2026, mostly on account of the improved primary balance.

Headline HICP inflation is projected to move broadly sideways during 2024, before declining to 2.2% in 2025 and 1.9% in 2026 (Chart 5). Headline HICP inflation declined from an average of 5.4% in 2023 to 2.4% in April 2024. It is expected to hover around 2½% in the coming quarters, with some volatility related primarily to base effects in energy prices. HICPX inflation is expected to be sluggish in its moderation, with little change over the rest of 2024. The persistence in HICPX inflation, which will remain above the historical average over the projection horizon, reflects mainly slowly easing services inflation. Given that food inflation is also seen to decline further only later in the horizon and energy inflation will mostly make a small positive contribution to HICP inflation, this implies a slow disinflationary path for headline inflation, which is expected to reach the 2% inflation target in the fourth quarter of 2025 (one quarter later than in the March projections).

Chart 5

Euro area HICP inflation

(annual percentage changes)

Following some volatility in the coming quarters, energy inflation is projected to remain muted over the medium term, as assumed declines in energy commodity prices are partly offset by climate-related fiscal measures. Energy inflation is expected to turn positive again in the second quarter of 2024, owing to upward base effects, the unwinding of government energy compensation measures and recent increases in crude oil prices. Between April 2024 and March 2025, the upward base effects account for most of the expected shift in energy inflation. In addition, the unwinding of energy and inflation compensatory fiscal measures between December 2023 and February 2025 is estimated to contribute 0.4 percentage points to headline inflation in 2024 and 0.1 percentage points in 2025. Once these base effects and the impact from the withdrawal of the energy-related fiscal measures fade, downward-sloping energy commodity price futures curves, partly offset by some upward impacts from climate-related fiscal measures, imply only very small positive contributions from HICP energy inflation in 2025 and 2026 (Chart 6).^[7]

Chart 6

Euro area HICP inflation – decomposition into the main components

(annual percentage changes, percentage point contributions)

Food inflation should remain broadly stable in the near term and decline moderately further, thereafter, as pipeline pressures from past increases in input costs ease. Food inflation continued to fall in the first few months of this year to stand at 2.8% in April, down from an average of 10.9% in 2023 on account of developments in both processed and unprocessed food components. To a large extent, this was due to easing pipeline pressures in view of lower energy and food commodity prices. Following an expected sidewards movement over the remainder of this year and most of 2025, food inflation is projected to decline slightly further to an average of 2.2% in 2026, owing to the lagged impact of continued dynamic labour cost pressures over the last two years of the projection horizon.

HICPX inflation is expected to decline gradually, to stand at 2.0% in 2026, owing mainly to a moderate unwinding of services inflation (Chart 7). Non-energy industrial goods (NEIG) inflation declined from an average of 5.0% in 2023 to 0.9% in April 2024, whereas the decline in services inflation was more moderate – from 4.9% in 2023 to 3.7% in April 2024. Declines in NEIG inflation since the beginning of 2024 stem from fading upward impacts from supply bottlenecks, indirect effects from past increases in energy and food prices and the downward impact from monetary policy tightening continuing to feed through. The projections include only negligible impacts from geopolitical tensions in the Middle East (including disruption to Red Sea shipping) on goods inflation, consistent with shipping costs being a small share of total goods costs, the relatively contained increase seen so far and the fact that these costs are based on longer-term contracts. In the medium term, the decline in HICPX inflation mainly relates to services inflation as post-pandemic reopening effects unwind and the as the downward impact from monetary policy tightening continues to feed through. A faster unwinding of services inflation is seen to be hindered by declining but still elevated upward pressures from labour cost developments.

Chart 7

Euro area HICP inflation excluding energy and food

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(annual percentage changes)

Compared with the March 2024 projections, the outlook for headline HICP inflation has been revised up by 0.2 percentage points for 2024 and 2025, owing mainly to upward revisions in HICP energy inflation and HICPX inflation, and is unrevised for 2026 (Chart 8). The upward revision to HICP energy inflation in 2024 is attributable mainly to higher energy commodity prices and, to a smaller extent, to changes in taxes and network and distribution charges. The upward revision to HICPX inflation is explained by data surprises in recent months, especially due to higher outcomes in HICP services inflation. These upward revisions are partly compensated by a downward revision to HICP food inflation, mainly on account of lower than expected recent data outturns. For 2025, food inflation has been revised up, reflecting higher than previously expected inflationary pressure from energy and labour costs. Later in the projection horizon, the upward revision to HICPX inflation also reflects the pass-through of higher unit labour costs. Headline inflation for 2026 is unrevised as a result of small upward revisions to HICPX inflation being offset by small downward revisions to food and energy inflation.

Chart 8

Revisions to the inflation projection compared with the March 2024 projections

(percentage point contributions)

Nominal wage growth is projected to decline gradually but remain elevated, allowing real wages to catch up with the levels prevailing before the inflation surge (Chart 9). Annual growth in compensation per employee stood at 4.7% in the fourth quarter of 2023. For 2024, it is projected to stand at 4.8%, on average, with some volatility during the year. It is then expected to continue moderating over the projection horizon while remaining above historical levels owing to still tight labour markets, inflation compensation and increases in minimum wages. Both negotiated wages and the wage drift are expected to make stronger contributions to compensation per employee growth than before the pandemic. Negotiated wage growth is seen to increase slightly in 2024, before easing gradually, with tight labour markets behind a more persistent contribution from the wage drift. In 2026 growth in compensation per employee is seen at 3.2%, somewhat exceeding the sum of projected productivity growth and HICP inflation. Compared with the March projections, the growth rate in compensation per employee has been revised up slightly for 2024 and 2026. This upward revision reflects the impact of incoming data, a slightly better cyclical position and a higher wage drift, and is in line with a tighter labour market, especially towards the end of the projection horizon. Real wages are expected to return to early 2022 levels in the third quarter of 2024, one quarter earlier than in the March 2024 projections.

Chart 9

Compensation per employee

(annual percentage changes)

Growth in unit labour costs is projected to decline notably. Unit labour cost growth should have peaked in 2023, when it averaged 6.1%, and it is expected to fall sharply to 2.1% in 2026. While it benefits from the projected rise in productivity growth coupled with the decline in wage growth, it will remain notably above the pre-pandemic average of 1.5%. Compared with the March staff projections, growth in unit labour costs has been revised up, especially for 2025 and 2026. This reflects the upward revision in compensation per employee and a downward revision in productivity growth.

Domestic price pressures, as measured by the growth of the GDP deflator, are projected to continue to decrease, with profit growth first providing a buffer for high labour cost pressure and subsequently recovering (Chart 10). The annual growth rate of the GDP deflator is projected to continue to decline quickly in the course of 2024, averaging 3.3% in 2024 and easing more gradually thereafter to an average of 2.0% in 2026. Unit profit growth peaked in early 2023 and has since slowed, with the outturn in the fourth quarter of 2023 below the expectations of the March projections. It is expected to remain notably below growth in unit labour costs throughout 2024, which implies that profit margins are buffering the relatively strong labour cost growth. As growth in unit labour costs moderates, unit profit growth is expected to recover somewhat as of 2025, helped by the economic recovery and strengthening productivity growth. Compared with the March projections, growth in the GDP deflator has been revised up for 2024 on account of upward surprises in incoming data for the first quarter of 2024, likely due to significantly higher unit profit growth. It has also been revised up marginally for 2025 and 2026, owing to higher unit labour cost growth, which in 2026 is partly offset by downward revisions to unit profits.

After a negative annual rate in 2024, import price inflation is expected to hover around 2% in the outer years of the projection horizon. Growth in the import deflator is expected to increase from -2.9% in 2023 to -0.2% in 2024, 2.0% in 2025 and 1.9% in 2026, broadly in line with the projection pattern for export competitors’ prices and the path of energy prices (see Section 1 and Box 2).

Chart 10

Domestic price pressures

a) GDP deflator and its components	b) GDP deflator and its components – revisions vs March 2024 projections
(annual percentage changes, percentage point contributions)	(percentage point contributions)

Alternative energy price paths

Future energy commodity price developments are very uncertain, and alternative paths for oil and gas commodity prices would have a significant impact on the economic outlook, especially for inflation. While the staff projections are based on the technical assumptions outlined in Box 1, this sensitivity analysis is used to derive alternative downside and upside paths from the 25th and 75th percentiles of the option-implied neutral densities for both oil and gas prices.^[8] Both the oil price and gas price distributions indicate upside risks to the technical assumptions used in the June 2024 projections (Chart 11). In addition, a constant price assumption is considered for the prices of both oil and gas. In each case, a synthetic energy price index (a weighted average of the oil and gas price paths) is computed, and the impacts of the alternative paths are assessed using a range of ECB and Eurosystem macroeconomic models employed in the projections. The average impacts on real GDP growth and HICP inflation across these models are shown in Table 6.

Chart 11

Alternative paths for energy price assumptions

a) Oil price assumption

(USD/barrel)

b) Gas price assumption

(EUR/MWh)

Box 2
Could China export disinflation?

This box considers alternative scenarios on China’s economic policies to bolster domestic growth and whether they may end up exporting disinflation to the euro area and the United States. In the June 2024 Eurosystem staff projections, China’s growth is projected to slow gradually over the projection horizon, weighed down by a struggling property sector. However, the manufacturing sector has been expanding because of supportive policy measures, as credit is flowing despite high levels of inventories and falling rates of capacity utilisation. Moreover, China’s export market share (in volume terms) has remained above its pre-pandemic levels (Chart A). Initially, this was supported by the pandemic-related shift in global consumption from services to goods, given China’s leading position in global merchandise trade in general and in products in demand during the pandemic in particular. However, despite the reversal of these pandemic-related effects on a global scale, China’s market share has increased by around 18% since early 2023, while the prices of its exports have declined further. This sets China apart from both the US economy, which has seen its market share return to pre-pandemic levels, and the euro area, which has not yet fully made up the losses in its market share since 2020.

Chart A

Export market shares

(volume indices; January 2010 = 100)

The euro area has stronger trade ties with China than the United States has. On the import side, the United States – previously more dependent on China than the euro area – reduced imports of Chinese goods from 2.8% of GDP in the early 2010s to 2.3% of GDP in the period 2019-20. Euro area imports of Chinese goods, however, moved in the opposite direction and more recently amounted to 3.5% of GDP. On the export side, the euro area remains more export-dependent on China than the United States, with 2.5% of euro area GDP being accounted for by exports to China, compared with 1.1% of US GDP in the case of the United States.

Three scenarios around the June 2024 baseline growth projections for China are explored: (i) an upside scenario, in which China achieves higher growth through credit support to the manufacturing sector, thus boosting domestic and foreign demand as exports become cheaper; (ii) a downside scenario, in which lower Chinese domestic demand owing to a steeper downturn in the residential sector is partially offset by higher exports supported by subsidies; and (iii) an adverse scenario, which is similar to the downside scenario but assumes that all economies except the euro area introduce trade barriers against China in response to Chinese subsidised exports. In this scenario, the euro area would remain the only large market open to Chinese exports. These scenarios are simulated using the ECB-Global model.

The scenarios imply spillovers from China to euro area and US inflation via several channels. In all scenarios under consideration, China’s falling export prices have a direct downward impact on import prices in the euro area and the United States through final and intermediate imports. They also dampen euro area and US foreign demand via a competitiveness channel, as the trading partners of the two economies divert their import demand towards China. In addition, there is a domestic expenditure switching channel, whereby domestic consumers substitute towards cheaper goods imports from China. This further reduces the demand for domestic firms’ goods, putting downward pressure on producer prices, and hence on inflation, owing to lower labour demand and wages. Ultimately, it also affects service prices. Changes in demand for goods from China would also affect global demand and commodity prices, thereby also transmitting to euro area inflation.

In the upside scenario, the impact on GDP and inflation is positive but relatively muted for both the euro area and the United States (Chart B). In terms of GDP impact, the adverse competitiveness effects from lower export prices in China, which lead to a reduction in both domestic production and foreign demand in the euro area and in the United States, are offset by the higher demand from China. Similarly, the impact of lower non-energy import prices is offset by higher oil prices and higher demand (both on account of higher Chinese demand) and spillovers turn out to be slightly positive for US and euro area inflation.

Chart B

Effects on euro area and US GDP and inflation

a) Real GDP	b) Consumer prices
(percentage point deviations from baseline growth rates)	(percentage point deviations from baseline growth rates)

In the downside scenario, China could indeed export disinflation (Chart C). In this scenario, the inflation dampening effect of export subsidies is compounded by lower global activity and foreign demand in the United States and the euro area as China’s economy experiences a downturn. Foreign demand falls more strongly in the United States, as the US dollar appreciates in this scenario owing to a flight-to-safety effect in light of the global downturn. Non-oil import price inflation falls by up to 70basis points in the United States and by slightly less in the euro area (as US dollar-denominated import prices fall less in euro terms). The compounded effects of lower demand and lower export prices in China exert downward pressure on real GDP and inflation both in the euro area and in the United States. Consequently, the growth impact on the euro area is estimated at 0.17 percentage points in 2025, only slightly above the 0.13 percentage points estimated for the United States. The euro area economy’s significantly larger export share of GDP to China would suggest a heavier drag on GDP than in the case of the United States. However, the appreciation of the US dollar in this scenario implies an additional drag on US output. Consumer price inflation would be roughly 20 basis points lower for both economies in 2025 under the assumption that monetary policy is exogenous. The effects on the euro area would be slightly larger if the euro were not to depreciate.

The adverse scenario entails the largest negative impacts for the euro area, with inflation falling by up to 40 basis points. In this scenario the effects are particularly severe, as China’s cheaper exports affect only the euro area, thus crowding out its domestic production. There is also a negative impact on the United States owing to trade diversion towards the euro area, as the latter benefits from cheaper inputs imported from China. The same effect helps cushion the adverse impact of cheap Chinese exports on euro area GDP. Euro area consumer price inflation falls by close to 40 basis points in this scenario.

Inflation spillovers are transmitted mainly through the trade channel but oil prices also play a significant role. A decomposition of euro area inflation impact by transmission channel shows that trade linkages play a major role in the downside scenario and the adverse scenario, while financial linkages are less important. In the upside scenario, the oil price increases by 2.5% relative to baseline, while in the other two scenarios the price falls by a similar amount. Overall, the oil price changes contribute a significant 10 basis points to the inflation spillover to the euro area.

Chart C

Decomposition of the impact on euro area headline consumer price inflation

(percentage point deviations from baseline growth rates)