Economists say European economy faces risk of continued recession | Wilnesh News

Germany and France, the euro zone’s largest economies, experienced a turbulent year last year, with political and economic turmoil meaning neither had a 2025 budget.

Economists say the trajectories of both countries are worrying and warn that a lack of growth, fiscal imbalances and political intransigence could lead to decline and loss of status across Europe.

Neil Shearing, the group’s chief economist, said: “Today’s situation is different from previous (sovereign debt) crises in that Europe’s worst problems are no longer concentrated in smaller economies such as Greece. Instead, Europe’s two The most important economy is in trouble.

“Without fundamental reforms at its core, Europe will face a continued recession,” Schilling said. Without fundamental reforms, he noted, “it is difficult to escape the conclusion that Europe’s future will be one of very low growth and permanent fiscal damage.” ongoing concerns about sustainability and the future of economic recession.

Currently, neither France nor Germany has a 2025 budget due to political infighting that ultimately led to the collapse of both governments.

Germany will hold new elections in February, and analysts are betting France will hold new parliamentary elections next summer. The two countries are currently operating with interim budgets after extending tax and spending rules for 2024 into this year, and it is uncertain when the two sides will reach an agreement on a 2025 budget.

France and Germany face different economic challenges, reflecting the dangers of overspending and underspending.

According to the International Monetary Fund, France’s budget deficit is expected to reach 6.1% by 2024, and the debt scale will reach 112%. The new government, led by Prime Minister François Bayrou, is expected to struggle to get the 2025 budget passed by warring representatives, just like his predecessor Michel Barnier.

Meanwhile, Germany faces snap federal elections in February after Chancellor Olaf Scholz’s ruling coalition collapsed in the autumn over differences over economic and budget policies. One of Germany’s problems is underspending and underinvestment, leading to slower economic growth.

“In stark contrast, Germany’s problem is that fiscal policy is too tight,” Capital Economics’ Schelling said.

“Although Germany’s public debt burden is low, its so-called ‘debt brake’ has significantly reduced the scope for deficit spending. With the economy stalling, Germany will benefit from easier fiscal policy – as this will almost certainly absorb other country’s imports.

Economists say the lack of a budget plan means Europe’s major economies will be unable to fully focus on economic expansion policies, continuing a worrying trend of sluggish growth in recent years.

This was caused by a combination of events such as the war in Ukraine and rising energy prices, which hit Europe’s energy-intensive industries, but was also exacerbated by weak demand – both externally and from countries such as China. Economic growth, weak consumer demand within Europe and deeper structural problems such as slow productivity growth and lack of competitiveness.

ECB seeks to boost euro zone economic activity Through interest rate cuts, a 25 basis point rate cut was implemented in December (the fourth rate cut this year), bringing the key interest rate to 3%. The central bank said it expects the euro zone economy to grow by 0.7% in 2024 and 1.1% in 2025.

Others say rate cuts will not help address structural issues such as Productivity growth is slowAs well as negative factors, such as the possibility that U.S. President-elect Trump will impose tariffs on European imports to the United States.

Jari Stehn, chief European economist at Goldman Sachs, told CNBC: “Our base case is that Europe will face a very difficult year in 2025.” The investment bank predicts that the euro zone economy will grow by 0.8% in 2025, while the euro area economy will grow by 2.5%. %.

“There are a lot of issues… high energy prices, a slowdown in China, political uncertainty, trade tensions are all negative,” he told CNBC’s “Squawk Box Europe.” However, investors are still looking for potential bright spots in the region.

“People are asking whether, in Germany, when there are new elections, we can get more financial support – we think there might be some, but we think it will ultimately be limited,” Stern said.

“People are also asking whether European consumers will end up with an unexpected surge, with high savings rates and actually having quite a bit of money (to spend), but again we think there will be some support, but it’s unlikely to be a huge one upside surprise.

Stern noted that lower interest rates “will help to some extent with savings and increased consumer spending, which is one of the reasons why we do think Europe will grow next year despite these challenges.”

“But at the same time, I think we also have to be realistic about a lot of the headwinds that we’re talking about (such as) energy prices, China, structural issues. Cutting interest rates is not going to solve all of those issues,” he said.

“Ultimately, this is going to be a challenging environment.”