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between Political unrestsome Weak economic data and Warnings Unable to realize its growth potential, Europe has had a difficult year. However, amid the gloomy outlook, analysts say there may be some bright spots to watch for in 2025.
Economic growth in Europe is not expected to accelerate any time soon, with the European Central Bank's release last week Lowering growth expectations For the year 2025 to 1.1%. Meanwhile, European Central Bank President Christine Lagarde said risks to growth “remain skewed towards the downside.”
It is about GDP expected To expand by 0.8% in the eurozone this year – an improvement from the 2023 annual growth rate of 0.4%but it is a far cry from 3.4% in 2022. Compared to US officials expected Growth of 2.7% this year
Focus is also on euro zone inflation after it briefly fell below the European Central Bank's target In the fall to 1.8%, but rising again 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 are watching as they assess Europe's prospects for 2025.
1. Monetary policy
Policymakers at the European Central Bank announced the fourth and final interest rate cut of the year Last Thursday. Markets are pricing in another 25 basis point cut when the European Central Bank's governing council makes its first policy decision of 2025, according to overnight index swap data.
For Callum Pickering, chief economist at investment bank Bill Hunt, this is not enough.
“The economic logic calls for a 50 basis point move, (but) I don’t think they will go to 50 basis points,” he told CNBC’s “Street Signs Europe.”
“I find the ECB's tone very hawkish,” Pickering added, explaining that economic issues in Europe have shifted from supply shocks to demand-side problems – making it doubtful that inflation will remain “flat” within six months.
Index swap data suggests that the majority of traders, such as Pickering, expect the ECB's key interest rate – currently at 3% – to be cut to 2% by mid-2025, with some anticipating further cuts in the second half of the year.
In a note to clients at the end of November, analysts at Bank of America declared 2025 “the year the (European Central Bank) interest rate drops below 2%.”
They added: “It is easy to think of a (deposit facilities) rate of 1%.”
2. Crisis of confidence
A Cautious consumer It is among the many headwinds Europe has faced this year.
In a Flash estimate In November, the European Commission found that consumer confidence fell by 1.2 percentage points year-on-year in the euro zone. Meanwhile, the European Commission Economic Sentiment Index – Confidence score derived from business and consumer surveys – Although stable, it has remained below its long-term average throughout the year, and is currently slightly lower than it will be in 2023.
However, Sylvain Breuer, chief EMEA economist at S&P Global Ratings, told CNBC that monetary policy changes in Europe could help boost lagging confidence levels.
“We believe the ECB is in a position to accelerate interest rate cuts, which could help (growth) because Confidence is still low Despite the ongoing economic recovery,” Brewer – who is Member of the Shadow Council of the European Central Bank Of the economists – they told CNBC's “Squawk Box Europe” last week.
“Fiscal policy has been restrictive over the last couple of years, and if you add in restrictive monetary policy, both parts of the policy mix in Europe have been restrictive – if we change that a little bit for 2025, that could help once and for all.”
3. Superior performance of peripherals
Chris Watling, CEO and chief market strategist at Longview Economics, highlighted the difference between European economies, with a handful of European countries expected to see a turnaround in their economic fortunes.
“From a two- to three-year point of view, 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 – it's the return of PIIGS.”
The abbreviation PIIGS stands for Portugal, Italy, Ireland, Greece and Spain, all of which have it Historically it has been considered Vulnerable to instability and economic crises.
European Commission expected The country's GDP is expected to grow by 3% this year and 2.3% in 2025, while the Organization for Economic Cooperation and Development expected Spain will see the third strongest growth among all OECD countries this year. Greek economic growth, meanwhile, is expected To reach 2.1% in 2024 and 2.3% in 2025.
But Watling's optimism about these countries comes despite a warning that Europe's financial markets could “face difficulties” in the first six months of 2025.
“The great thing about a crack in the markets in the first half is that it encourages central banks around the world to cut interest rates further and gives us a re-acceleration of the global economy at the end of next year into 2026,” he said.
4. Definitions
Although some good news may be on the horizon for Europe, a second Trump presidency – and the tariffs that could come with it – It has the ability to create new obstacles.
Threats from President-elect Donald Trump Imposing tariffs of 10% to 20% on all US imports antiquities Uncertainty in European companies And it led to questions about How can the region respond?.
In its European Way Forward report, Citi said a 10% tariff could cut EU GDP by 0.3% by 2026, “while a new trade war between the US and China could double the damage in vulnerable countries.” Like Germany.”
“We think retaliation is unlikely, which could make this a deflationary shock, but global fragmentation will hurt trade-dependent Europe in the long term,” the analysts added.
Tariffs are likely to be used as a bargaining chip by the next US administration, said Janet Moy, head of market analysis at wealth management firm RBC Brewin Dolphin.
“Tariffs are a major threat, of course,” she added. “But a reasonable assumption would probably be that Trump doesn't follow through on his threats.”
5. Political instability
Europe is also facing political uncertainty within its borders, with two of the region's largest economies, France and Germany, in the midst of political turmoil.
The former French Prime Minister was Michel Barnier Overthrown and replaced Earlier this month, while German Chancellor Olaf Scholz He lost the vote of confidence on MondayThis paves 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 has really collapsed into stagnation and paralysis,” David Roche, a strategist at Quantum Strategy, said. He told CNBC Earlier this month.
“The heart of Europe (looks) very bad economically and politically, and I think the markets will eventually reflect that.”
Maximilian Ohler, head of European equity and cross-asset strategy at Deutsche Bank, said political uncertainty in Germany could actually lead to a turnaround in the German economy. The country's faltering economybut.
“Germany is known for its political stability, and there have only been two instances of coalition breakups in recent history,” he said in a December 16 memo to agents. “Both times, Germany was facing recession, introduced reforms and emerged stronger… Don't underestimate Germany's ability to change.”
