The economic outlook for the euro area in the medium term remains uncertain, with growth anticipated to stay subdued in the near term while inflation is expected to see a temporary increase, European Central Bank President Christine Lagarde noted on Wednesday.
Lagarde, addressing members of the European Parliament, highlighted that "survey-based data indicate weaker growth prospects ahead, driven by a slowdown in the services sector and continued contraction in manufacturing."
However, over time, the economic recovery in the eurozone is projected to gain momentum. This is attributed to an anticipated rebound in consumer spending as real incomes rise, alongside a recovery in investments as the effects of previous interest rate hikes begin to diminish, according to the ECB President.
Lagarde also pointed out that survey data suggests a slowdown in employment growth and further moderation in labor demand, despite the labor market’s resilience thus far, evidenced by historically low unemployment rates and continued job growth.
"The medium-term economic outlook remains uncertain and is overshadowed by downside risks," she remarked, noting that "geopolitical risks are heightened, with increasing threats to international trade."
She cautioned that the eurozone is vulnerable to external shocks due to its high level of trade openness and integration into global supply chains. Additionally, potential trade barriers could threaten both manufacturing and investment sectors. Lagarde mentioned that labor cost growth, a significant factor in persistent services inflation, is projected to slow further in the coming months.
Looking forward, she explained that inflation is expected to temporarily climb in the fourth quarter as previous significant drops in energy prices phase out of the annual rates, before returning to target levels next year.
There is a broad expectation that the ECB will lower interest rates again this month, following an anticipated rise in inflation in November, as policymakers express growing concerns about sluggish growth.
"We will reassess our position next week, adhering to our data-driven and meeting-by-meeting strategy," Lagarde stated. "Hence, we are not committing to a specific rate trajectory at this time."
The ECB had previously reduced rates by the same extent in September and October.