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Amid political turmoil, some weak economic data and warn Europe has had a difficult year as it failed to realize its growth potential. However, amid the gloomy outlook, analysts say there could be some bright spots to watch in 2025.
European economic growth is not expected to accelerate soon, with the European Central Bank last week lowering its 2025 growth forecast to 1.1%. Meanwhile, European Central Bank President Christine Lagarde said growth risks “remain tilted to the downside.”
The emergence of GDP is expected The eurozone will grow by 0.8% this year – an improvement on the annual rate in 2023 0.4%but a far cry from the 3.4% in 2022. In contrast, U.S. officials expected Growth this year is 2.7%.
Eurozone inflation also came into focus after briefly falling below the European Central Bank’s target of 1.8% in the autumn, but rose back above the 2% target in November.
As investors and economists try to decipher what’s next for the region, here are five key things they’re watching as they weigh Europe’s prospects for 2025.
1. Monetary policy
ECB policymakers announce fourth and final interest rate cut this year Last Thursday. When the ECB’s Governing Council makes its first policy decision in 2025, markets expect another 25 basis point rate cut, according to overnight index swap data.
For Kallum Pickering, chief economist at investment bank Peel Hunt, that’s not enough.
“The economic logic supports a 50 basis point hike, but I don’t think they’re going to do a 50 basis point move,” he told CNBC’s “European Signpost.”
“I find the ECB’s tone too hawkish,” Pickering added, explaining that Europe’s economic problems have shifted from supply shocks to demand-side issues, raising questions about whether inflation will still be “sticky” six months from now. ”.
Index swaps data shows that, like Pickering, most traders expect the ECB’s key interest rate, currently at 3%, to fall to 2% by mid-2025, with some predicting further cuts in the second half of this year.
In a note to clients at the end of November, Bank of America analysts announced that “(ECB) policy rates will be below 2%” in 2025.
“A 1% (deposit facility) interest rate is a no-brainer,” they added.
2. Crisis of trust
one cautious consumer This is one of the many headwinds Europe faces this year.
in a flash estimate The European Commission found that consumer confidence in the euro zone fell by 1.2 percentage points in November compared with the same period last year. At the same time, the European Commission economic climate index — Confidence scores from business and consumer surveys — while stable, remained below long-term averages throughout the year and are now slightly below where they were in late 2023.
However, Sylvain Broyer, chief Europe, Middle East and Africa economist at S&P Global Ratings, told CNBC that monetary policy changes in Europe could help boost lagging confidence levels.
“We think the ECB has the ability to accelerate interest rate cuts, which could help (economic growth) because Confidence remains low Even as the economy continues to recover,” Broyles—who is Member of the European Central Bank’s “Shadow Committee” Economist – told CNBC’s “Squawk Box Europe” last week.
“Fiscal policy has been restrictive over the last two years, and if you add restrictive monetary policy, both legs of the European policy mix are restrictive – and if we change that a little bit in 2025, there will definitely be something. help.
3. Excellent peripheral performance
Chris Watling, CEO and chief market strategist at Longview Economics, highlighted the divergences among European economies, with a handful of European countries set to see their economic fortunes improve.
“From a two- to three-year perspective, Europe is going to have some good times,” Watling told CNBC’s “Squawk Box Europe” earlier this month. “I think Southern Europe is really exciting – the return of PIIGS.”
The abbreviation PIIGS refers to Portugal, Italy, Ireland, Greece and Spain, and each country has have historically been considered vulnerable to economic instability and crises.
European Commission expect The country’s GDP will grow by 3% this year and 2.3% in 2025, while the OECD expect Spain’s economic growth this year will rank third among all OECD countries. At the same time, the Greek economy grew expected It will reach 2.1% in 2024 and 2.3% in 2025.
However, despite warnings that European financial markets could be “in trouble” in the first six months of 2025, Watling remains optimistic about these countries.
“The good thing about the cracks in the market in the first half of the year is that it encourages central banks around the world to cut interest rates further and allows us to re-accelerate the global economy between the end of next year and 2026,” he said.
4. Tariffs
While some good news may be on the horizon for Europe, Trump’s re-election as president — and the tariffs that will come with it — It is possible to create new obstacles.
President-elect Donald Trump’s threat to impose tariffs of 10% to 20% on all U.S. imports has stoked uncertainty among European businesses and raised questions about how the region will respond.
Citigroup said in the “Road to Europe” report that 10% tariffs may reduce EU GDP by 0.3% by 2026, “and a new U.S.-China trade war may double the losses of affected countries such as Germany.”
“We think a similar retaliation, which would lead to a deflationary shock, is unlikely, but global fragmentation will hurt trade-reliant Europe in the longer term,” the analysts added.
Janet Mui, head of market analysis at wealth management firm RBC Brewin Dolphin, said the incoming U.S. administration may use tariffs as a bargaining chip.
“Tariffs are certainly a key threat. But it’s probably a reasonable assumption that Trump won’t fully follow through on his threats,” she added.
5. Political instability
There is also political uncertainty within Europe, with France and Germany, the region’s two largest economies, in the throes of political turmoil.
Former French Prime Minister Michel Barnier Chancellor Olaf Scholz, who was ousted and replaced earlier this month, lost a confidence vote on Monday, paving the way for elections early next year.
“Think of (Europe) as a soufflé, and the rising part of the soufflé has always been France and Germany, and that’s really been stagnant and paralyzed,” Quantum Strategy strategist David Roche told CNBC earlier this month.
“Economic and political conditions in core Europe (look) extremely bad, and I think markets will ultimately reflect that.”
However, political uncertainty in Germany could actually trigger an improvement in the country’s faltering economy, said Maximilian Uhler, head of European equities and cross-asset strategy at Deutsche Bank.
“Germany is known for its political stability – only twice in recent history have alliances collapsed,” he said in a note to clients on Dec. 16. “Both times, Germany faced economic recession, introduced reforms and came back stronger… Don’t underestimate Germany’s ability to change.”
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