Eurozone economy is facing 'headwinds,' European Central Bank's Lagarde says

By Jamie Chisholm

The European economy is facing headwinds amid subdued activity in the region's manufacturing base, European Central Bank President Christine Lagarde said on Monday.

Speaking at a European Parliament briefing in Brussels, Lagarde said that the bloc's service sector is holding up well but that manufacturing and construction remain subdued.

"Looking ahead, the suppressed level of some survey indicators suggests that the recovery is facing headwinds," she told the Committee on Economic and Monetary Affairs.

Lagarde's cautious tone dovetails with Germany's leading economic institutes, which last week downgraded growth for Europe's biggest economy to minus 0.1% this year, and it comes amid dour sentiment in the automobile sector, with Stellantis (IT:STLAM), Mercedes-Benz (XE:MBG) and Volkswagen (XE:VOW) among those in recent days to warn about waning demand.

However, Lagarde expressed optimism that the eurozone's economic recovery will strengthen over time, "as rising real incomes should allow households to consume more."

Furthermore, the labor market remains resilient, with an unemployment rate of 6.4% in July, which was broadly unchanged over the past year.

This allowed the ECB's latest projections to show the region's economy growing by 0.8% in 2024, 1.3% in 2025 and 1.5% in 2026, she said.

The soft economic activity has helped the ECB bring inflation back down toward its 2% target, with the headline annual rate at 2.2% in August, and Lagarde said she expected it to fall further in September, mainly the result of declining energy costs.

"Looking ahead, inflation might temporarily increase in the fourth quarter of this year as previous sharp falls in energy prices drop out of the annual rates, but the latest developments strengthen our confidence that inflation will return to target in a timely manner," Lagarde said.

"We will take that into account in our next monetary policy meeting in October," she added.

Markets are currently pricing in a 75% probability that the ECB will reduce its main deposit rate next month by another 25 basis points, to 3.25%.

The 10-year German bond yield BX:TMBMKDE-10Y rose 1.4% to 2.137%, the euro (EURUSD) fell 0.1% to $1.1155 and the STOXX Europe 600 index XX:SXXP fell 0.7%.

-Jamie Chisholm

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09-30-24 1109ET

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