Europe is entering a technical recession, according to a report from the Swiss Re Institute, which kept its euro area GDP growth forecasts unchanged, at 0.1% in third quarter GDP growth.
In its recent European economic outlook, Swiss Re affirmed its previous call that the European Central Bank (ECB) is done with its rate hiking cycle, noting that rate cuts will start in 2024 and likely before the Federal Reserve.
Meanwhile, risks are tilted to more and earlier rate cuts if inflation will continue to “slow faster than originally projected.”
Swiss Re also noted that the Bank of England (BoE) is likely staying on hold through to the end of the year and cutting interest rates late in 2024.
However, the ECB and BoE are likely to monitor first how wage negotiations go around the turn of the year. This is to reconfirm the slowdown in underlying inflation before they feel comfortable to start cutting rates later next year.
One of the themes observed in the study is that sovereign bond yields are off their decade-long highs reached in autumn after the recent declines in global inflation rates. The firm also said bond yields are expected to remain below recent highs and inflation will continue to slow. However, Swiss Re sees bond yields structurally higher than the last 10 years amid a higher term premium, positive real yields, and the unwinding of the QE regime.
Meanwhile, Swiss Re noted that constraints on government expenditures pose risks to short-term growth.
Swiss Re said weaker economic activity should reduce the demand for labour, and the unemployment rate in many countries will slowly rise.
These will lead to the lowering of aggregate demand more widely as confidence and incomes fall, underscoring Swiss Re’s pessimistic growth forecast for Europe.
