Morgan Stanley is upgrading its forecasts for the growth of the Eurozone economy to 0.8% (from 0.6% previously) for 2023. However, the house’s analysts remain pessimistic for 2024 and downgrade their growth forecasts to 1% (from 1.1%). The restrictive monetary policy significantly burdens the economy, the house’s analysts note.

As Morgan Stanley explains, the Eurozone faces two main difficulties: The inflationary shock and the monetary policy shock. Stronger than forecast figures through March show we are between two waves. In particular, while the inflationary shock is subsiding, the monetary shock has not yet significantly affected the Eurozone economy.

Thus, analysts estimate that GDP will be strong in the first half of 2023, but weaken thereafter as the negative effects of monetary tightening intensify and the outlook for the US economy becomes more negative than previously expected.

In fact, Morgan Stanley does not rule out the possibility that the performance of 2024 will turn out to be even worse than its forecasts, especially if a more severe deterioration of the US economy affects the global economic cycle or if the availability of loans in the Eurozone deteriorates more than it expects .

Morgan Stanley: The Eurozone between two shocks – The new forecasts for growth

As analysts point out, the financial conditions and lending conditions of the banks have tightened significantly since the ECB began the interest rate hikes, with loan volumes falling sharply. However, lending conditions are far – so far – from the levels of the global financial crisis, with the house attributing the substantial reduction in new loans to weaker demand and not to a shock on the supply side.

In this environment, and after the latest turmoil in the markets, Morgan Stanley estimates that the European Central Bank will proceed cautiously and complete rate hikes at lower levels. Specifically, the house expects three more interest rate increases, of 25 basis points each, in May, June and July.