In the first half of 2024 the Eurozone had its best two quarters of growth in two years. But forward-looking data suggest this recovery is now losing steam. 

Despite strong real disposable income growth and the start of interest rate cuts, the European consumer is becoming a bit more hesitant. Still high borrowing costs, lingering pessimism about earnings prospects, a less tight labour market, falling home prices, and possible long-term "belief scarring" following the pandemic may all be limiting the propensity to spend.

And the industrial recovery faces structural headwinds, particularly in Germany, while fixed asset investment remains tepid. 

All that said, we don’t expect a recession. But growth over the second half of 2024 is likely to be slower than in the first. Trend growth in the Eurozone is probably capped around 1.2%. 

If we’re right that the economy is set to slowly expand, ECB officials will continue to look primarily to the inflation outlook when setting policy. 

This means the ECB will continue with its cautious approach to the cutting cycle. We forecast two more cuts this year and three in 2025, and think current market pricing may have slightly overshot the extent of easing.

However, with growth concerns building, risks of a more rapid easing cycle are increasing.

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