With the fourth quarter of 2023 underway, the eurozone economy feels like it is teetering. It is too early to say the entire economy is in a recession, but certain sectors are either already in contraction or very near to being in contraction.
There was sufficient growth in the first half of 2023 to ensure the annual average for the overall economy this year will register positive growth, but the data is getting weaker as the year progresses. This weakness will carry into the first half of 2024. The forecast currently calls for a rise in real GDP of 0.5 percent in the euro area in 2023, and this will be followed by a gain of just under 1.0 percent in 2024.
Of particular importance to manufacturers and suppliers in the plastics industry is the fact that the goods producing sector of the eurozone economy is in contraction. The activity in the services sector is currently keeping the overall growth rate for the economy positive, but it is increasingly clear that the pace of growth in the services sector is also decelerating.
While it is obvious the reason for the current trend of deceleration in the economic activity is the sharp increase in interest rates in recent quarters, there is an uncomfortable amount of uncertainty about what will happen during the next two or three quarters. This uncertainty is clearly indicated in recent survey indicators from the eurozone.
The European Central Bank hiked interest rates 25 basis points last month and left open the possibility that it will raise interest rates further if the inflation data should warrant another hike. But given the most recent economic data, the most likely scenario is the hiking cycle is over.
The problem for the ECB — and also the Federal Reserve in the United States — is estimating the length and the impact of the lag time between when they raise interest rates and when these increased rates start to have their full effect on the economy. Compounding this problem is the fact that this lag time as well as the severity of the impact associated with the rate hikes varies greatly from sector to sector within the economy.
The services sector of the economy is currently exhibiting the greatest resilience to the effects of the rising interest rates. This is also the sector that is putting the greatest amount of upward pressure on the price data. In other words, the services sector is showing a relatively low level of sensitivity to rising interest rates, at least so far. Based on data only from the services sector this year, a case for yet higher interest rates seems plausible. However, the last data point for the rate of inflation for the services sector represented a faster pace of deceleration than expected. If this trend continues, then the need for further rate hikes will be nullified.
The story is markedly different for the goods producing sectors of the economy, which are showing high levels of sensitivity to the rising interest rates. The manufacturing sector is already in contraction, and the price data for most goods is trending flat to down in recent quarters. The recent manufacturing data indicates that a near-term rate cut should strongly be considered.
The main reason for these diverging narratives is the rising cost of labor. Wages have risen across all sectors of the economy, but labor inputs typically have a greater effect on the services sector. Ultimately, rising wages and lower inflation will give consumers more discretionary income, which they will then be able to spend on greater amounts of both goods and services.
This bodes well for the longer-term outlook for the euro area economy. But for now, rising wages and higher interest rates have put the manufacturing sector under strain. It will likely take at least two or three quarters before these factors return to a healthy equilibrium.
One final factor affecting the outlook for the eurozone is the continued slowdown in global trade. A stronger-than-expected resilience in the U.S. economy — and a corresponding rise in the value of the dollar vis-à-vis the euro — will be mitigated by lower-than-expected growth in China. Overall, global trade activity will remain at or near a cyclical low point for a quarter or two longer but should then start to improve by the second half of 2024.
Summing it all up, economic conditions will remain challenging for eurozone manufacturers in the near term. Growth will be stagnant at best, both domestically and globally. This situation for plastics manufacturers will be exacerbated by the market deselection of many types of plastics products, especially in the packaging segment.
In the long term, I believe there will be huge opportunities for the plastics industry. I am confident we can all get to a future that is sustainable and circular with a rising standard of living for everyone, and I am certain the bridge to that future is built mostly of plastic.
All we need to do is redesign, refocus and rebrand the plastics industry. We have to reinvent ourselves. The market will zealously embrace this reinvention because the need is great and getting bigger every day.
Euro Area Outlook
Annual percent change
Rate of inflation
Unemployment rate (percent of labor force)
Sources: European Central Bank, Mountaintop Economics & Research Inc.