Is the output gap shrinking in the euro zone?

The output gap is the gap between the level of real GDP and the level of potential GDP. When the positive output gap shrinks, GDP grows less quickly than potential GDP. It is often assumed that the euro zone’s output gap narrowed sharply in 2023, and that it will narrow further in 2024, leading to a fall in inflation and corporate margins. But is growth significantly lower than potential growth? If we look at year-on-year growth in real GDP in the euro zone and in potential GDP (the sum of the trend in labour productivity growth, the employment rate and the working-age population), we see that potential growth in the euro zone is 0.3% per year. This increase in potential growth is slightly higher than that of actual growth in 2023, but lower than the expected increase in growth in the euro zone in 2024. In reality, growth over the two years 2023 and 2024 is very close to potential growth, which casts doubt on the consensus scenario of a significant decline in inflation and profit margins.