Lagarde: “Europe in Disinflation” While European Commission Limits GDP Estimates

Inflation in Europe is falling, but at the same time, expectations of economic growth are falling as well.

ECB President Christine Lagarde explained in a speech before the European Chamber’s Economic and Monetary Affairs Committee that “the current disinflationary process in the euro area is expected to continue.” In particular, lower energy costs are favored by lower prices, but this is “difficult to predict,” and greater confidence in the soundness of these processes is needed to proceed with rate cuts. “I won’t say whether we will cut rates in late spring or early summer, but we are hopefully on track to 2%,” Lagarde concluded, acknowledging that the eurozone economy was weak in 2023, while a recovery is expected in 2024.

Meanwhile, on February 15, the European Commission published estimates of (declining) inflation in the eurozone to be 2.7% in 2024 and 2.2% in 2025, while the EU expects 3% in 2024 and 2.5% in 2025.

However, economic growth estimates are also understated, with eurozone GDP expected to grow by 0.8% in 2024 (it was +1.2% in the November 2023 estimates) and 1.2% in 2025 (instead of +1.6%). However, for the entire European Union, the new estimates point to +0.9% in 2024 (from +1.3%) and confirm +1.7% in 2025.

At the presentation of the new estimates, Economic and Monetary Affairs Commissioner Paolo Gentiloni explained that geopolitical tensions and the risk of expanding conflict in the Middle East make the forecasts particularly uncertain. Gentiloni also summed up the Red Sea crisis, explaining that at the moment supply chains do not seem to be under much strain, even though “delivery times between Asia and the EU have increased by 10-15 days, and the cost has risen by about 400%.”