What challenges and opportunities does Eurozone have next months?

The eurozone economy has weakened throughout 2023, with the Composite Purchasing Managers’ Index dropping below 50 in June, signifying a moderate contraction.

This weakness stemmed from Europe’s recovery from an energy shock, as well as a lack of fiscal support in comparison to the more resilient US economy. Interest rate hikes have also been felt more quickly in the region due to its shorter debt maturities.

Germany, which contributes for more than a quarter of eurozone GDP, has slowed regional development, with industrial production falling for the sixth straight month in November.

Germany’s softness reflects weakness in the global industrial cycle, but structural headwinds such as a loss of competitiveness relative to China and rising petrol prices since the start of the Ukraine crisis are also expected to play a role.

Given recent constitutional court decisions, fiscal policy appears to have little chance of saving the day. The overall picture shows an economy trying to acquire traction, with Germany accounting for more than a quarter of eurozone GDP.


Inflation in Europe has peaked and is now swiftly declining, with headline inflation in the eurozone already around 3% and core inflation decreasing to roughly 3.5% year on year.

The European Central Bank is likely to decrease interest rates this year, starting cautiously because the central bank wants to be assured it has won the fight against inflation.

The ECB may wind up decreasing the policy rate by less than what the market is now pricing for this year, but there is still room for greater cuts given that equilibrium interest rates in Europe and around the world remain low.

European bond markets are cautious on the front end of the curve, but there are chances in the middle, with projections for longer-term rate decreases and low destination policy rates. Being in this area of the curve also avoids the long end, which might be vulnerable to increased issuance needs and the ECB shrinking its balance sheet.

European duration is considered an excellent portfolio diversifier since yields are often lower than in the United States, and duration interest rate risk has hedging features.