Following the pandemic, the eurozone has struggled to turn recovery into enduring growth.
Headwinds have intensified lately, with activity remaining sluggish.
The industrial economy is struggling to cope with shifting supply chains, weak external demand, waning competitiveness and high borrowing costs. Elevated geopolitical uncertainty made consumers reluctant to spend, with the boost from real incomes accruing to higher savings.
With labor markets still tight and rising real incomes poised to sustain purchasing power, a recession seems unlikely. Reflation is no longer a threat, as energy vulnerabilities have abated. With risks of inflation undershooting the European Central Bank’s (ECB) target over the medium-term, we expect monetary policy to ease steadily through the summer of 2025. Lower rates will provide a much-needed tailwind for the economy.
The eurozone will remain an underachiever.
Though improved economic fortunes lie ahead, growth in 2025 will be nothing to write home about. The manufacturing sector’s woes are unlikely to fade completely. American protectionism, alongside fractious political environments in Germany and France, will add to uncertainty. With the focus clearly on consolidation, fiscal policy won’t come to the rescue either. Downside risks to growth and changing political realities could make debt consolidation efforts more complex.
More joint debt issuance along with closer integration could help the bloc’s structural woes, but these measures are unlikely to win adherents. Due to a relatively slow adoption of artificial intelligence, among other factors, the eurozone is unlikely to see a substantial productivity boost in 2025.
Overall, the structural outlook for the eurozone remains challenging. We expect improved but below-potential growth next year.
Click on the chart to zoom in and explore the data.
