The Conference Board Economic Forecast for the Euro Area Economy

11 December 2024 / Report

For more resources on the European economy, please see our monthly Economy Watch report and annual long-term outlook (October 2022).

No room for optimism: Downside risks will continue dominating the Euro Area’s outlook in 2025

Sluggish growth into the year. Timelier Purchasing Managers’ Index (PMI) data show that private sector growth in the bloc remained in negative territory at the end of 2024. The fall in activity was entirely driven by the manufacturing sector, where a combination of both cyclical (e.g., low demand for goods) and structural (e.g., high energy prices) factors continue to curb industrial output. By contrast, business growth in the services sector returned to positive territory, suggesting services will continue doing the heavy lifting of the Euro Area’s economic rebound in the near term. At the country level, all three of the bloc’s largest economies saw their monthly business output shrink, though less steeply than from a month ago. Evidently, the Euro Area economy enters 2025 on a weak note as downside risks to the growth outlook persist. High energy prices and weaker demand will keep weighing on manufacturing activity. Political and policy uncertainty could further dampen business and consumer sentiment, and prospects of higher tariffs can further impact exports. Also, restrictive fiscal policies could further depress domestic demand and activity. On the upside, a robust labor market, strengthened real wages, and a less restrictive monetary policy are expected to support the economy. All things considered, following below-trend growth of around 0.8% in 2024, the Euro Area economy is projected to recover only modestly in 2025, with growth averaging 1.0% and 1.4% in 2026.

Headline inflation exceeds 2%, core inflation remains at high levels. January-published data show that annual inflation in the Euro Area rose to 2.4% in December, up 0.2% from the previous month. The increase in consumer prices was almost exclusively driven by a much-expected spike in energy prices, growing from -2.0% the previous month to +0.1% year-on-year. Core inflation, however, remained unchanged at 2.7% for a fourth straight month, primarily as a small decline in annual goods prices (from 0.7% in November to 0.6%) was offset by a subtle increase in services inflation (from 3.9% to 4.0% year-on-year). December’s inflation spike should not be a cause for concern as still prevalent energy base effects continue to skew the monthly inflation readings. We still see headline inflation averaging around 2.1% in 2025 as energy and food prices will continue to normalize in the year ahead. Core inflation, however, will remain more difficult to tame as some wage pressures in the Euro Area still persist. As a result, underlying price pressures will continue to grow at an average rate of 2.4% in 2025 before getting closer to 2% in early 2026.

Weak growth ahead paves the way for more rate cuts in 2025. In December, the European Central Bank (ECB) further eased its monetary policy, lowering its three main rates by another 25 basis points (bp), bringing the deposit rate to 3.0%. At a December 14 press conference, ECB President Christine Lagarde highlighted three facts regarding the Euro Area’s macroenvironment. First, the economy is set to strengthen slowly in 2025 as manufacturing woes continue and services activity remains weak. Second, inflation is on track to hit 2% and underlying price pressures are set to fall further as the labor market cools and wage growth slows down. Third, downside risks to the outlook still prevail as trade wars loom and the energy outlook remains volatile. All in all, as the economy struggles, the ECB is determined to continue loosening its monetary stance in 2025, even as stickier core prices cloud the speed and scale of future cuts. Looking forward, the bank is preparing to cut rates by another 25bp in January, for the fifth time since June 2024, while our baseline scenario assumes at least four more rate cuts in 2025.

The labor market remains the Euro Area’s economy bright spot. Unemployment across the Euro Area stabilized at a historical low of 6.3% for the third consecutive month in December, providing more evidence that the Euro Area job market continues to demonstrate remarkable resilience. On the demand side, employment also grew by 0.2% quarter-on-quarter, with the region adding an additional 295,000 jobs. Looking ahead, the Euro Area labor market is expected to maintain its positive momentum in 2025, with the unemployment rate stabilizing at around 6.5% and employment rising, although at a slower pace than in 2023 and 2024.

For more resources on the European economy, please see our monthly Economy Watch report and annual long-term outlook (October 2022).