Eurozone economies are seeing diverging growth patterns across sectors along with improvements in consumer confidence, driving a mixed outlook for the year

The cautious optimism seen in the eurozone at the start of 2024 has partly materialized. The combined eurozone economy grew more than anticipated in the first quarter (0.3% quarter on quarter), as net exports (exports minus imports) boosted growth while private consumption grew modestly. Eurozone exports declined disproportionally (compared to world trade) last year, especially at the end of it: This hints at the fact that this growth at the beginning of the year might be a base effect—at least partly. While consumer expenditures grew, real income grew even more, driving growth in their savings rate—that is, while consumers could have spent more, they saved at least part of their extra income in things like savings accounts.

This economic recovery continued in the second quarter at the same pace (that is, 0.2% quarter on quarter): Although the details are yet to be published, it is likely that consumer expenditure was the primary factor supporting this growth. Yet, development was not uniform across countries: Spain’s economy grew by 0.8% and Germany’s economy contracted slightly, while France and Italy grew moderately by 0.2% compared to the last quarter.

Going by sector, the gap between manufacturing and services has widened further as manufacturing outputs drag economic activity (figure 1), especially in Germany and Italy. Production figures are notably weak in chemicals, textiles, furniture, wood, and printing. The situation seems to be a mix of various factors: With weak foreign demand and elevated (geopolitical) uncertainty, higher energy prices have affected energy-intensive industries like chemicals. Consumer preferences and needs have shifted from goods like furniture and textiles—both of which were in high demand during the pandemic. And ongoing digitalization efforts have reduced demand for things like printing equipment, with corporates and consumers opting for online and digital documentation and content.

In contrast, the services sector has been growing over the past quarters modestly. The information and communication sector has been demonstrating strong growth. On the other hand, the real estate–related services are still weak, in line with subdued construction activity.

Consumer sentiment indicators currently point toward similar or somewhat weaker economic activity in the coming months. The European Commission’s economic sentiment indicator has been plateauing without a clear direction over the past months (standing just below its long-term average).

A diverging trend between consumer and business sentiment is apparent (figure 2): Whereas consumer confidence has been recovering over the past months (from very low levels), other sectors are stagnating or worsening. Although rising real incomes and high savings are boosting consumer sentiment, spending has been rather sluggish recently, especially in consumer goods. But modest growth in consumer expenditure is expected in the current quarter, as consumers’ mood improves along with their purchasing power.

For businesses, the future seems to be cloudier, also indicated by the purchasing managers’ index. This composite indicator has been increasing for eurozone from the end of last year to June 2024. Yet, in July, the increase came to a halt, while the indicator itself weakened again: Now, it stands just above 50, still indicating minor growth. Index values fell for all sectors, pointing to a softening dynamic also in the services sector.

Yet, production and incoming orders for Germany’s industrial sector grew in June—pointing toward stabilization. Overall, the economic outlook for the coming quarters remains mixed: Although growth rates forecasted at the beginning of the year might not be achieved, a growth rate closer to the one seen over first half of the year remains likely.

The European Central Bank announced a first rate cut of 0.25 percentage point in June and another in September. Headline inflation fell to 2.2% in August, down from 2.6% in July. Core inflation fell slightly from 2.9% to 2.8%, while services inflation increased very slightly from 4% to 4.1% between July and August. Services inflation figures are still relatively high. Nevertheless, no major adjustments have been made to inflation forecasts and an annual rate of around 2.5% for this year still seems realistic.

Just as growth dynamics, inflation dynamics are quite different across eurozone countries, making the central bank’s task quite challenging. Even though differences in inflation rates are already much lower than during the peak of inflation at the end of 2022, considerable differences still exist. In Belgium, prices are still increasing by 4.3%, whereas in Finland, inflation has receded to 1.1%. These differences are not only due to differences in energy component, as core inflation values vary between 4.9% (Estonia) and 2% (Finland).

In the near term, private consumption should support eurozone’s economic growth. Export activity is expected to gradually start picking up along with strengthening foreign demand. Further easing of the central bank’s tight monetary policy should lessen the drag in growth in some sectors, especially construction.