Weaker-than-expected growth in Q4 casts shadow on EA’s near-term economic rebound.
Growth in Q4 disappoints and casts shadow on EA’s growth prospects ahead. According to Eurostat’s flash estimates, the Euro Area GDP stagnated in Q4 . Germany and France both disappointed, contracting by -0.2% and -0.1% quarter-on-quarter(q-o-q), respectively, while the Italian economy stalled. On the upside, the Spanish economy continued outstripping market forecasts, growing by an impressive 0.8% (q-o-q). In 2024, Europe’s fourth largest economy expanded by more than 3%, four times faster than the EA average. The key contributors to this performance have been, a very robust tourism sector, horizontal reforms enhancing labor market conditions, strong government spending and less reliance on Russian gas or manufacturing . This is in sharp contrast to aggregate EA developments. Timelier data on business confidence and consumer sentiment remain weak, despite small improvements compared to a month ago. Prolonged underinvestment in France, manufacturing contraction in Germany, and weak consumption in Italy all suggest recovery in the single currency region will remain fragile and below-potential in the year ahead. This justifies our slight downward revision of our GDP growth forecasts for the EA. We now expect the region to expand by 0.9% in 2025 (from 1.0% a month ago), while growth in 2026 is likely to come in slightly lower at 1.3%.
Headline inflation increases for the fifth month straight. Annual inflation rose to 2.4% in January, up a tenth from a month ago. Thiss fifth consecutive increase was solely driven by a significant spike in energy prices, which rose year-on-year from a flat 0% to 2.0% in January. Core inflation, a more accurate measure gauging underlying inflationary pressures in an economy, remained unchanged at 2.7% year-on-year. Yearly goods inflation stabilized at 0.5%, while services-prices fell marginally, from 4.0% to 3.9%. While we still see inflation coming closer to the target in 2025, January’s spike in prices is another reminder that this is not guaranteed. Domestic producers’ prices, for instance, continue to increase alongside selling price expectations implying employers are now more willing to pass on parts of the higher input costs to consumers. And finally, looming trade wars must not be overlooked either, also increasing uncertainty around the inflation outlook.
The ECB cut in January and is expected to do the same in March. In January, the European Central Bank (ECB) lowered its key rates by another 25 basis points (bp), bringing its main policy rate (i.e., deposit) below the 3.0% threshold, at 2.75%. There are good reasons to expect the central bank will continue in March with, most likely, an other quarter point cut. Expectations remain grounded that inflation will continue to decline in the coming quarter as the manufacturing recession shows no imminent signs of recovery, and private consumption is supportive but not pivotal to the region’s growth. Consequently, we make no changes to our monetary policy projections, still expecting the bank to cut at least two more times in 2025 if not more, expecting to land between 2.00% and 1.75% towards the end of the year.
Unemployment remains at an all-time low, and employment expectations improve. The European labor market remains resilient. Recent data show that the unemployment rate continues at the all-time low levels of 6.3%. Employment expectations have also improved according to January data published by the European Commission. We require more information on firms’ hiring intentions, however, to understand whether the improved conditions shown by the January labor data releases will be sustained. Nonetheless, the Euro Area labor market should remain robust in the year ahead. We still see unemployment rate stabilizing at around 6.5% in 2025 and employment rising, though more slowly than in 2023 and 2024.
Key economic developments and (geo)political events to pay close attention to:
- German elections: Following Social Democrat Olaf Scholz's three-party coalition collapse in late November, Federal elections are expected to be held on February 23rd. Latest poll showed Friedrich Merz's conservative Christian Democrats (CDU) party leading the polls with 10 points ahead of the far-right rival AfD run by Alice Weidel. Outgoing chancellor Schotz is polling steadily in the third place, with polls showing the party concentrates 15% of the votes. The Greens follow closely. Anemic growth, migration policies, Ukraine’s funding and public spending are the key issues that will shape the final vote.
- French Budget: French fiscal uncertainty that prevailed since the summer has been paused with Bayrou’s temporary government finally passing a delayed budget in early February. This was enough to calm the markets with spreads between France’s 10-year borrowing costs over Germany falling from the November’s highs. But spending cuts and significant tax hikes (e.g., corporate tax rate is expected to double to 41.2%) are likely to give a new blow to French businesses’ confidence and investment decisions. Latest data showed private investments contracted in Q4 2024 for a fifth straight quarter.
- Trade wars: The European Commission enters a “tit for tat” mode, after US President Donald Trump announced a 25% tariff on all steel and aluminum imports coming in the US. In a brief statement late on Monday (February 11th)), European Commission President von der Leyen explained that the EU will respond with firm and proportionate countermeasures to Mr. Trump’s tariff hikes, similar to what it had done in previous instances. However, the threat of blown out trade wars cannot be excluded.
Weaker-than-expected growth in Q4 casts shadow on EA’s near-term economic rebound.
Growth in Q4 disappoints and casts shadow on EA’s growth prospects ahead. According to Eurostat’s flash estimates, the Euro Area GDP stagnated in Q4 . Germany and France both disappointed, contracting by -0.2% and -0.1% quarter-on-quarter(q-o-q), respectively, while the Italian economy stalled. On the upside, the Spanish economy continued outstripping market forecasts, growing by an impressive 0.8% (q-o-q). In 2024, Europe’s fourth largest economy expanded by more than 3%, four times faster than the EA average. The key contributors to this performance have been, a very robust tourism sector, horizontal reforms enhancing labor market conditions, strong government spending and less reliance on Russian gas or manufacturing . This is in sharp contrast to aggregate EA developments. Timelier data on business confidence and consumer sentiment remain weak, despite small improvements compared to a month ago. Prolonged underinvestment in France, manufacturing contraction in Germany, and weak consumption in Italy all suggest recovery in the single currency region will remain fragile and below-potential in the year ahead. This justifies our slight downward revision of our GDP growth forecasts for the EA. We now expect the region to expand by 0.9% in 2025 (from 1.0% a month ago), while growth in 2026 is likely to come in slightly lower at 1.3%.
Headline inflation increases for the fifth month straight. Annual inflation rose to 2.4% in January, up a tenth from a month ago. Thiss fifth consecutive increase was solely driven by a significant spike in energy prices, which rose year-on-year from a flat 0% to 2.0% in January. Core inflation, a more accurate measure gauging underlying inflationary pressures in an economy, remained unchanged at 2.7% year-on-year. Yearly goods inflation stabilized at 0.5%, while services-prices fell marginally, from 4.0% to 3.9%. While we still see inflation coming closer to the target in 2025, January’s spike in prices is another reminder that this is not guaranteed. Domestic producers’ prices, for instance, continue to increase alongside selling price expectations implying employers are now more willing to pass on parts of the higher input costs to consumers. And finally, looming trade wars must not be overlooked either, also increasing uncertainty around the inflation outlook.
The ECB cut in January and is expected to do the same in March. In January, the European Central Bank (ECB) lowered its key rates by another 25 basis points (bp), bringing its main policy rate (i.e., deposit) below the 3.0% threshold, at 2.75%. There are good reasons to expect the central bank will continue in March with, most likely, an other quarter point cut. Expectations remain grounded that inflation will continue to decline in the coming quarter as the manufacturing recession shows no imminent signs of recovery, and private consumption is supportive but not pivotal to the region’s growth. Consequently, we make no changes to our monetary policy projections, still expecting the bank to cut at least two more times in 2025 if not more, expecting to land between 2.00% and 1.75% towards the end of the year.
Unemployment remains at an all-time low, and employment expectations improve. The European labor market remains resilient. Recent data show that the unemployment rate continues at the all-time low levels of 6.3%. Employment expectations have also improved according to January data published by the European Commission. We require more information on firms’ hiring intentions, however, to understand whether the improved conditions shown by the January labor data releases will be sustained. Nonetheless, the Euro Area labor market should remain robust in the year ahead. We still see unemployment rate stabilizing at around 6.5% in 2025 and employment rising, though more slowly than in 2023 and 2024.
Key economic developments and (geo)political events to pay close attention to:
- German elections: Following Social Democrat Olaf Scholz's three-party coalition collapse in late November, Federal elections are expected to be held on February 23rd. Latest poll showed Friedrich Merz's conservative Christian Democrats (CDU) party leading the polls with 10 points ahead of the far-right rival AfD run by Alice Weidel. Outgoing chancellor Schotz is polling steadily in the third place, with polls showing the party concentrates 15% of the votes. The Greens follow closely. Anemic growth, migration policies, Ukraine’s funding and public spending are the key issues that will shape the final vote.
- French Budget: French fiscal uncertainty that prevailed since the summer has been paused with Bayrou’s temporary government finally passing a delayed budget in early February. This was enough to calm the markets with spreads between France’s 10-year borrowing costs over Germany falling from the November’s highs. But spending cuts and significant tax hikes (e.g., corporate tax rate is expected to double to 41.2%) are likely to give a new blow to French businesses’ confidence and investment decisions. Latest data showed private investments contracted in Q4 2024 for a fifth straight quarter.
- Trade wars: The European Commission enters a “tit for tat” mode, after US President Donald Trump announced a 25% tariff on all steel and aluminum imports coming in the US. In a brief statement late on Monday (February 11th)), European Commission President von der Leyen explained that the EU will respond with firm and proportionate countermeasures to Mr. Trump’s tariff hikes, similar to what it had done in previous instances. However, the threat of blown out trade wars cannot be excluded.
For more resources on the European economy, please see our monthly Economy Watch report and annual long-term outlook (December 2024).
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