A lacklustre recovery for the Eurozone’s lukewarm economy

We expect stronger activity in the eurozone in 2025, but growth will remain lacklustre as the consumer recovery lacks momentum. Monetary policy will become less restrictive, but fiscal policy will continue to drag on growth. External demand is set to improve, but prospects are prone to risks from rising protectionism. We anticipate GDP growth of 1.3% in 2025, slightly below consensus.

What you will learn:

• One of the biggest questions shaping the outlook is European consumers’ willingness and capacity to spend. Consumer spending has underperformed despite a strong recovery in real incomes, and we are becoming increasingly sceptical that a strong spending cycle will take off, as the labour market shows increasing signs of softness, and households may opt to keep a larger amount of savings instead.
• We still think the elements are in place for a cyclical revival in the industrial sector. But we expect a more protracted recovery than previously given the persistent weakness of the German manufacturing sector and flagging orders.
• Interest rate cuts should provide a boost to the European economy, but the impact is likely to be larger in 2026 than in 2025 given transmission lags. Corporates stand to benefit more quickly from looser financing conditions, whereas the impact on households will vary across countries given differences in mortgage markets and passthrough to savings rates.
• We expect inflation to fall below target next year as energy and food become disinflationary. We anticipate core inflation will moderate and stabilise around 2%. Services inflation should ease amid lower wage growth, but the disinflation process in goods is likely coming to an end.