The Eurozone economy has stagnated over the last three quarters, although growth in the second quarter was marginally positive due to strong idiosyncratic growth in one or two smaller countries.
The countries that are more dependent on services, such as France and Spain fared better, compared to Germany and Italy, for instance, which rely more on manufacturing and exports. Nonetheless, soft data and leading indicators suggest the services sector is unlikely to remain resilient. Preliminary PMI data indicate demand weakness is spreading to services, although activity is stalling rather than contracting at this stage. Forward-looking employment indicators – wage offers for new jobs – also suggest some moderation in labour market strength. Employment, however, remains strong and this should support demand near term.
1. Reduced fiscal support will add to already weak domestic demand.
In 2022 and 2023, energy-related fiscal support measures amounted to about 2% of GDP (ECB estimates*) but, next year, we expect this support to be reduced and, together with the return of fiscal rules, should reduce aggregate fiscal support to an average of less than 1% across the Euro area (ECB estimates*).
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