The Conference Board Economic Forecast for the Euro Area Economy

Looming trade wars and political gridlock threaten Europe's pace of economic rebound.

As political upheaval dominates November, uncertainty looms across Europe. November’s political crises in Germany and France have raised significant concerns about the Euro Area’s (EA) pace of economic recovery. In Germany, Scholtz’s three-party coalition collapsed earlier in the month amid persistent riffs on the debt brake (which translate to annual budget deficits not exceeding 0.35% of GDP) and economic reforms. In France, prime minister Michel Barnier received a no-confidence vote after trying to force through his budget bill without a vote – including tax raises and budget cuts worth nearly 60 billion euros – eventually submitting his resignation and triggering the collapse of his government. Outside of Europe, President Trump’s re-election in the US has added to the EA’s long list of concerns as export-heavy Europe (close to 60% of the Euro Area’s GDP comes from trade) is particularly exposed to trade restrictions.

Business confidence weakens, consumers lose momentum. Business confidence in the Euro Area turned negative in November, dropping to a new 9-month low according to S&P’s Composite Purchasing Managers’ Index (PMI). The manufacturing downturn deepened further, as weak global demand for goods persisted and prospects of higher tariffs weighed further on business sentiment. Services activity also turned negative as consumers have become more reluctant to spend. In fact, consumer confidence declined in November, falling from -12.5 in October to -13.7, with Europeans consumers more worried now about the general economic situation and the state of their own personal finances compared to a month ago. All things considered, we now expect economic growth in the Euro Area to decelerate firmly in Q4, with the economy expanding in 2024 by 0.9%. Notably, at the country level, Germany is the only leading European economy which is expected to contract for a second consecutive year in 2024, or by 0.2% year-on-year, for the first time since 2003. Looking further ahead, we project modest recovery, with the EA economy growing below-potential in 2025, by 1.1%, as structural challenges continue to put downward pressure on the bloc’s growth prospects. As for 2026, more favorable financing conditions and strengthened domestic demand should help the economy gain some  momentum, expanding at a rate of around 1.4% year-on-year.

Headline inflation exceeds the 2% threshold in November. Annual headline inflation in the Euro Area increased to 2.3% in November, 0.3pp higher compared to a month ago. The increase in consumer prices was largely due to energy prices falling less fast compared to last year. Food inflation also declined marginally, from 2.9% a month ago to 2.8% year-on-year. Unlike headline inflation, underlying price pressures remained unchanged compared to last month, with annual core inflation standing at 2.7% year-on-year. At the country level, overall inflation increased in all four leading European economies but remained close to the ECB’s 2% objective. As Novembers’ jump in inflation was expected, we make no changes to our inflation forecasts for 2025. We still expect headline inflation to average around 2.4% and 2.1% in 2024 and 2025 respectively, while core inflation will take longer to get closer to 2%, likely averaging 2.9% and 2.5% in 2024 and 2025, respectively.

We continue to expect a quarter point cut in December. Diminishing business activity and consumer confidence coupled with policy uncertainty inside and outside of the euro area justify a further cut by the ECB in December - for the fourth time in 2024. We still project that cut to be a quarter point – and not 50bp – as, despite the much weaker economic outlook, price pressures are still prevalent across the common currency bloc. Core inflation for example remains higher than the ECB’s 2% objective, services price growth keeps hovering around 4%, and timelier data on negotiated wages showed wage growth pressures continue to be strong, particularly in key European economies like Germany. Looking further ahead, as growth is expected to remain below-trend in 2025 and downside risks to the outlook have increased, we still see a strong case for the ECB to lower its main policy rates at least five more times by the end of next year, bringing the deposit rate anywhere between 1.5% and 1.75%.

The labor market continues to be a source of resilience, but for how long? Unemployment  across the euro area has stabilized at the historical low of 6.3% for the second consecutive month in October, more evidence that the European job market continues to demonstrate remarkable resilience. But how resilient labor markets are going forward, is yet to be seen. Squeezed profit margins amid weaker economic activity and stagnant productivity growth  add pressure on European employers, eventually threatening the bloc’s labor markets . As a result, while we are far off from seeing any dramatic spikes in unemployment  over the near term, a small uptick in the bloc’s jobless rate should be expected given the economic conditions are unlikely to turn brighter any time soon.