Investors are cautiously optimistic on Europe in 2024. Here’s what to watch

After a choppy 2023, economists believe that the European economy is set for a transitional year, as major headwinds — high inflation and rising interest rates — fade into the rearview mirror.

Despite the euro zone’s tough economic backdrop, the pan-European Stoxx 600 stock index closed out the year 12.6% higher on hopes of a significant loosening of monetary policy in 2024 from the U.S. Federal Reserve and the European Central Bank.

Major stock indexes in Europe and around the world have made a more uncertain start to 2024, as they await fresh rounds of data and signals from monetary policymakers.

Global markets rallied during the final two months of 2023, as bond yields pulled back on hopes that the Fed and ECB would begin cutting interest rates in early 2024. The latter has yet to signal any imminent policy easing, even as the market price a first cut in March.

Despite December’s uptick in the headline consumer price index to 2.9% year-on-year, euro zone inflation remains on a general downward trajectory at both the core and headline level, after cooling more than was broadly expected in recent months.

“While wage growth is still firm and the labour market remains resilient, we expect both to soften in 2024 and look for core inflation to reach 2% year-on-year in [the fourth quarter of 2024], much earlier than projected by the ECB,” Goldman Sachs Chief European Economist Jari Stehn said in note on Friday.

“As a result, we see earlier and faster policy rate cuts than implied by the Governing Council’s recent communication.”

The Wall Street giant sees a first rate cut in April, followed by 25 basis point reductions at each meeting until rates reach 2.25% in early 2025, implying six rate cuts totalling 150 basis points in 2024.

Three key factors

This outlook was partially mirrored by Deutsche Bank, which holds that the European economy will begin…