Eurozone: geopolitical tensions will shave off one point of GDP in 2024

Brussels – The overall situation is improving, at least as far as inflation trends are concerned. Although this has prompted the European Central Bank to cut interest rates again, there is nothing to be cheerful about because, as it is, geopolitical tensions have already shaved off a point of growth and remain the main factor in a possible economic deterioration. In a speech at the Bank of Lithuania Annual Economics Conference, ECB President Christine Lagarde, issues her warning, using the event organized to mark the 10th anniversary since the adoption of the euro in the Baltic country to sound the alarm.

“The main downside risks relate to the weaker-than-expected growth outlook and the increased uncertainty surrounding growth triggered by geopolitical events,” Lagarde stressed. A reference to the conflict between Russia and Ukraine, the war between Hamas and Israel, and trade tensions between the EU and China. A reference that is not accidental because, she points out, “if we go back to our June 2023 projections, we expected average growth of 1.8% in 2024. Now, we expect 0.7%.” So, tensions on the international chessboard eat up a point of GDP for the eurozone, and Lagarde is well aware of this. 

Due to various events outside the European Union and its euro area, the ECB president continues, “For some time now, we have been seeing small sequential downward revisions to the growth outlook, which have cumulatively amounted to a quite significant downgrade over time.” The result is anemic growth, at least so far. However, prospects point to a restart in the year ahead, provided that the international chessboard remains calm and new geopolitical tensions do not add or exacerbate old ones. 

There is more, however. Lagarde emphasizes a missing piece to remind national governments of their responsibilities. “The most important driver of our growth forecast misses has been the domestic economy,” which states must take responsibility for. “Around half of the misses since end-2021 relate to investment and a quarter relate to consumption.” Stimulus policies are needed on both fronts, at the very least, to recover that point of GDP lost to external factors.