Eurozone Growth Anchored in Resilient Domestic Demand
The European Union institutions have recently reaffirmed their confidence in the eurozone’s economic trajectory, emphasizing that resilient domestic demand is offsetting persistent external headwinds. While global trade remains subdued due to geopolitical tensions and weaker growth in key markets like China, internal consumption has emerged as the primary engine of expansion. According to the European Commission’s Spring 2024 Economic Forecast, eurozone GDP is projected to grow by 1.3% this year, with over 80% of that growth attributed to household consumption and services activity—highlighting a structural shift toward self-sustained momentum.
Sector Drivers: Consumers, Services, and Labor Market Strength
Consumer spending in the eurozone has remained robust despite elevated inflation in prior years and tighter monetary policy. Real disposable income has stabilized as inflation cooled from double-digit peaks in 2022–2023 to 2.6% in April 2024, according to Eurostat. Wage growth, averaging 4.1% year-on-year in Q1 2024, has outpaced inflation for three consecutive quarters, restoring purchasing power. This dynamic is particularly evident in Germany and Spain, where retail sales rose 1.8% and 3.2% respectively in March compared to the previous year.
The services sector, which accounts for approximately 70% of eurozone GDP, has been a critical contributor to internal demand. The IHS Markit Eurozone Services PMI averaged 53.4 in the first four months of 2024, indicating consistent expansion. Notably, business and consumer-facing services—from IT consulting to hospitality—are experiencing renewed hiring and capital investment. This reflects both pent-up demand and a structural reallocation of spending post-pandemic.
Labor Markets Provide Structural Support
A tight labor market underpins consumer confidence and spending durability. The eurozone unemployment rate held at a near-historic low of 6.5% in March 2024, with youth unemployment down to 14.9%, the lowest since records began in 1998. Countries like the Netherlands (3.1%) and Czechia (2.5%) report labor shortages in skilled sectors, pushing firms to raise wages and improve retention. Sustained employment growth reduces downside risks to consumption and enhances fiscal sustainability—key factors for long-term investor confidence.
Investment Implications: Equities and Bonds Reassessed
Given the strength of domestic fundamentals, we recommend a strategic rotation into eurozone equities, particularly among mid-cap companies with high exposure to local consumption. These firms—often under-owned by international investors—tend to benefit more directly from regional wage growth and service sector expansion than export-heavy multinationals. For example, the STOXX Europe 600 Mid Cap Index has delivered a total return of 12.4% year-to-date, outperforming large caps by nearly 300 basis points.
In fixed income, the improving growth backdrop supports a duration extension strategy in core European sovereign debt. With the European Central Bank signaling a gradual normalization of policy rates—having cut the deposit facility rate by 25 bps in June 2024—longer-dated bunds and OATs offer attractive real yields. Ten-year German Bund yields now stand at 2.7%, while French OATs yield 3.1%, providing competitive risk-adjusted returns relative to U.S. Treasuries, especially after adjusting for currency hedging costs.
Relative Stability vs. U.S. and UK Markets
Compared to the United States and the United Kingdom, the eurozone presents compelling diversification benefits. U.S. markets remain concentrated in a handful of technology stocks, with the S&P 500’s top five firms accounting for nearly 25% of index returns in 2023. In contrast, eurozone equity performance is more evenly distributed across sectors such as healthcare, industrials, and consumer staples—offering lower correlation and reduced concentration risk.
The UK, meanwhile, faces distinct challenges including stagnant productivity, political uncertainty ahead of a general election, and a current account deficit exceeding 3% of GDP. Sterling-denominated assets have underperformed, with the FTSE 100 up only 4.1% in 2024. By comparison, the eurozone’s balanced recovery and stronger fiscal positions in core countries provide greater macroeconomic stability, making it a more reliable haven during periods of global volatility.
Risks on the Horizon
Despite positive momentum, investors should remain vigilant about emerging risks. Energy price volatility remains a concern, particularly given Europe’s continued reliance on imported natural gas. Although storage levels are adequate for summer 2024, any disruption in supply routes—especially from Norway or liquefied natural gas shipments—could reignite inflationary pressures and strain household budgets.
Political fragmentation in key member states also poses a medium-term threat. Upcoming elections in France, Germany, and Belgium could bring coalition governments with divergent fiscal priorities, potentially delaying EU-wide reforms or infrastructure spending. Furthermore, rising support for populist parties may complicate budget negotiations and debt sustainability discussions, especially in highly indebted nations like Italy and Greece.
Conclusion: Positioning for Sustainable Growth
The eurozone’s ability to maintain growth through domestic demand underscores its maturing economic resilience. While external trade remains vulnerable to global swings, internal drivers—consumption, services, and employment—are proving durable. For global investors, this environment favors selective exposure to regionally focused equities and higher-duration sovereign bonds. However, active risk management remains essential given energy and political uncertainties. A diversified, fundamentals-driven approach will be key to capturing the eurozone’s evolving opportunity set.