Eurozone's uneven economic recovery means more monetary easing

Summary

• The Eurozone economy is entering 2025 on an unsteady and uncertain footing. While household fundamentals are still favorable overall, they may become less supportive as 2025 progresses, suggesting the pace of consumer spending could slow. The outlook for the corporate sector remains challenging, and a further decline in investment spending cannot be ruled out.

• In addition to mixed fundamentals, sentiment has slipped through the latter part of 2024. Political uncertainties in France and Germany, and concerns surrounding the threat of U.S. tariffs on imports from Europe, are factors that have weighed on sentiment. Given the mixed fundamental backdrop and softening sentiment, our Eurozone GDP outlook for 2025 is for growth of just 0.9%. However, considering the prevailing uncertainties, we view the risks to even this modest outlook as to the downside.

• Considering the underwhelming Eurozone economic outlook, and even with some lingering inflation pressures, we expect the European Central Bank (ECB) to continue steadily along its monetary easing path through much of 2025. We maintain our outlook for 25 bps ECB rate cuts at the January, March, April and June meetings, with a final 25 bps rate cut in September, for a terminal ECB policy rate of 1.75%. The growing wedge between European Central Bank and Federal Reserve policy interest rates is likely, in our view, to keep the euro on the defensive versus the greenback over the medium term.

Eurozone outlook remains uncertain and unsteady

The Eurozone economy stagnated in 2023, in response to a spike in energy prices and inflation, and as European Central Bank monetary policy moved into restrictive territory. The region's economy has since experienced a recovery starting from early 2024, although that rebound has been uneven—a trend we think is likely to continue in 2025 given distinctly mixed fundamentals and as sentiment surveys remain downbeat.

Among the brighter pieces of recent economic news, Eurozone Q3 GDP grew 0.4% quarter-over-quarter, lead by a 0.7% gain in consumer spending. There are also indications that consumer activity may have continued expanding during the fourth quarter, with real retail sales for the October-November period up 0.4% compared to their third quarter average. However, while consumer fundamentals remain favorable overall (and certainly more so than for the corporate sector), there are signs they may become less supportive as 2025 progresses.

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