What to watch | 06 December 2024

Private consumption is still lagging behind economic growth, despite declining interest rates and recovering real wages. In fact, savings rates are on the rise – unlike in the US – and savings intentions are also at historic highs. Inflation has eroded financial asset gains and led to the lower interest rates that have dragged down house prices. Net financial assets of French households grew by just +1.5% since the end of 2019, while in Germany this figure is +6.0% and in Italy and Spain +7.4% and +11.8%, respectively. Meanwhile, US households have seen net financial assets grow by +10.7% in the same period. With persistent uncertainty, especially over the upcoming German election and ongoing French political turmoil, alongside an impending fiscal consolidation and a normalization of wage growth, savings intentions are unlikely to come down in Europe. Against this backdrop, Eurozone policymakers and political leaders need to push a credible plan to address the cyclical and structural challenges.

At its next meeting on 12 December, we expect the ECB to cut the deposit rate for a fourth time this year to 3.00%. Recent economic data has surprised to the downside, with leading indicators struggling against the backdrop of a weak German economy and looming US tariffs from the incoming Trump administration. Given the dim outlook, which will hit consumer and business confidence, we have once again lowered our expectations for the terminal rate to 2.0% and sped up the cutting path to a meeting-by-meeting approach. Meanwhile, inflation concerns have taken a back seat: The second uptick to 2.3% y/y in November can largely be attributed to base effects while services inflation – long regarded as a sticky problem – has sequentially fallen to the lowest value since 2021.