These 2 are Citi’s key constraints for a more bullish view on Europe By Investing.com

Investing.com — Analysts at Citi Research in a note on Monday point to two key constraints preventing a more upbeat outlook for Europe, particularly the eurozone’s economic outlook, namely the European Central Bank’s (ECB) cautious approach of monetary policy and the German budget. conservatism.

The first major obstacle comes from the ECB’s dovish stance on interest rates. While there are encouraging signs of easing inflation – both headline and core inflation rates are expected to fall below 2% by 2025 – the ECB remains hesitant to cut interest rates aggressively.

The Eurozone has had a better start to 2024 than we expected, and the outlook for consumption or the strong performance of the periphery is constructive, Citi said.

“Repairing supply and easing labor market conditions should allay fears of sticky inflation and open room for ECB interest rate cuts,” analysts said.

This approach is driven by concerns within the institution, particularly from more demanding policymakers, who fear that rising wages and inflation could still destabilize expectations.

Despite disinflationary trends, the ECB’s reluctance to act more quickly limits the potential for monetary policy to play a stronger role in stimulating investment, output and consumer spending.

Without a more proactive stance, the region’s economic growth remains limited, delaying the potential for a robust recovery.

In addition to ECB caution, Germany’s fiscal conservatism is another significant obstacle.

As Europe’s largest economy, Germany has a huge influence on the overall trajectory of the Eurozone.

Citi analysts note that Germany’s strict adherence to the constitutional “debt brake” hinders the country’s ability to engage in the kind of fiscal stimulus that could revitalize its economy.

While other major eurozone economies such as Spain and Italy benefit from structural improvements and external financial support through the Next Generation EU (NGEU) funds, Germany is bound by rules that limit its ability to increase government spending .

This comes at a time when the German economy faces structural challenges, including high energy costs, demographic pressures and sluggish export demand.

Continued fiscal restraint amid these headwinds prevents Germany from using the tools needed to boost growth.

“We currently expect the government to reduce the budget deficit from 2.1% of GDP in 2023 to 1.8% of GDP in 2024 and 1.3% of GDP in 2025, despite an economy that is stagnant or mild recession,” analysts said.

The combination of the ECB’s reluctance to ease monetary policy more aggressively and Germany’s stiff fiscal stance forms a barrier to a more optimistic outlook for the eurozone.

These constraints limit the potential for both monetary and fiscal stimulus at a time when external challenges from weak global demand and geopolitical uncertainties are already weighing on Europe’s growth potential.