In 2023, the Euro area had a mixed year economically. Although initially resilient to the energy crisis, growth faltered due to high energy prices, tight monetary policy, and weak foreign demand.

While short-term indicators remain weak, some forward-looking indicators suggest potential growth in the future.

Where do you anticipate potential difficulties may arise?

Maxence Radix, Managing Partner, CAPZA: “Two factors could jeopardise the gradual recovery.

First, external demand, which has provided little support to the economy in 2023, is forecast to continue to inch down in 2024 as global goods trade continues contracting, impacted by geopolitical tensions, increased protectionism, and the slowdown of the Chinese economy. A potential extension of the conflict in the Middle East could cause disruptions to energy supplies and have a powerful impact on energy prices and global output. In addition, national elections in 60-plus countries this year may curb capital expenditures and spending as economic agents may take a wait-and-see approach.

Second, the EU faces significant structural challenges, including low productivity growth, green and digital transitions, pressure to increase defence spending, ageing, and social inclusion. These issues must be tackled despite record high sovereign debt levels, in the context of re-introducing fiscal rules.”

What about private debt markets?

Guillaume de Jongh, Managing Partner, CAPZA: “Since 2022, private credit funds have benefitted from the bank retrenchment, which has limited competition in a higher interest-rate environment. Double-digit yields come with lower leverage multiples, higher equity contributions, and tighter documentation.

In 2024, credit markets should gradually return to normality with more appetite from banks and CLOs against a backdrop offering more stability and visibility. This liquidity should enable both private equity and private debt funds to gradually resume their portfolio rotation, spurring the pipeline of new opportunities. However, credit selection remains pivotal when defaults are likely to creep higher, and the lagged effect of policy tightening may be most acute.”