Europe’s economy faces a bumpy ride in 2025. Here are 5 things to keep in mind

Between political upheavalsome weak economic data And Warnings Europe has had a difficult year given that it is not reaching its growth potential. However, given the bleak outlook, analysts say there could be some bright spots to watch out for in 2025.

Economic growth in Europe is not expected to accelerate any time soon, the European Central Bank said last week Cutting its growth forecast for 2025 to 1.1%. ECB President Christine Lagarde, meanwhile, said risks to growth “continue to trend downwards.”

It depends on what the GDP is like expected will grow by 0.8% in the euro area this year – an improvement on the annual growth rate of 2023 0.4%but a far cry from the 3.4% in 2022. By comparison, US officials expect 2.7% growth this year.

Inflation in the euro zone is also in focus after briefly falling below the ECB’s target in autumn to 1.8%, but rises again above the 2% target in November.

As investors and economists try to figure out what’s next for the region, here are five key things to keep in mind as they weigh Europe’s prospects for 2025.

European Central Bank policymakers announced their fourth and final interest rate cut of the year last Thursday. Markets are pricing in a further 25 basis point cut when the Governing Council makes its first policy decision in 2025, according to overnight index swap data.

For Kallum Pickering, chief economist at investment bank Peel Hunt, that doesn’t go far enough.

“The economic logic favors 50 basis point moves, (but) I don’t think they will go for 50 basis points,” he told CNBC’s “Street Signs Europe.”

“I find the ECB’s tone far too hawkish,” Pickering added, explaining that Europe’s economic problems had shifted from supply shocks to demand-side issues – making it doubtful that inflation would still be “stubborn” in six months. will be.

Index swap data suggests the majority of traders like Pickering expect the ECB’s key interest rate – currently at 3% – to be cut to 2% by mid-2025, with some expecting further cuts in the second half of the year .

In a note to clients at the end of November, Bank of America analysts said that 2025 “is the year the ECB’s key interest rate falls below 2%.”

“A (deposit) rate of 1% is certainly conceivable,” they added.

A careful consumer is one of the many headwinds Europe has faced this year.

In one Flash estimate For November, the European Commission found that consumer confidence in the euro zone fell by 1.2 percentage points year-on-year. Meanwhile the European Commission Economic sentiment indicator – a trust score derived from business and consumer surveys – remained stable but remained below its long-term average throughout the year and is currently slightly lower than it was at the end of 2023.

However, Sylvain Broyer, chief EMEA economist at S&P Global Ratings, told CNBC that monetary policy changes in Europe could help bolster declining confidence levels.

“We believe the ECB has the ability to accelerate rate cuts, which could help (growth) because Trust is still low despite the ongoing economic recovery,” Broyer said a member of the “shadow council” of the ECB by economists — told CNBC’s “Squawk Box Europe” last week.

“Fiscal policy has been restrictive in the last two years. If you add restrictive monetary policy, the two pillars of the policy mix in Europe have been restrictive – if we change that a little for 2025 that could definitely help.”

The acronym PIIGS refers to Portugal, Italy, Ireland, Greece and Spain historically taken into account vulnerable to economic instability and crises.

The European Commission expected The country’s GDP is expected to grow by 3% this year and 2.3% in 2025, while the OECD expected Spain will record the third strongest growth of all OECD countries this year. Greek economic growth, on the other hand, is expected will be 2.1% in 2024 and 2.3% in 2025.

However, Watling’s optimism about these countries comes despite warnings that European financial markets could face “problems” in the first six months of 2025.

“The great thing about markets seeing a breakthrough in the first half of the year is that it encourages central banks around the world to cut interest rates more and gives us a revival of the global economy at the end of next year by 2026 ” he said.

While there is some good news on the horizon for Europe, a second Trump presidency – and the tariffs that may come with it – has the potential to create new obstacles.

President-elect Donald Trump’s threats All U.S. imports are subject to tariffs of 10% to 20% worked Uncertainty among European companies and led to questions how the region might respond.

In its European Road Ahead report, Citi said a 10% tariff could cut the EU’s GDP by 0.3% by 2026, “while a new US-China trade war could double the damage in exposed countries like Germany. “

“We think like-for-like retaliation is unlikely, which would make this a deflationary shock, but global fragmentation will hurt trade-reliant Europe in the long run,” the analysts added.

Janet Mui, head of market analysis at asset manager RBC Brewin Dolphin, said the tariffs would likely be used as a bargaining chip by the new U.S. administration.

“Tariffs are of course a key threat. But it’s probably a reasonable assumption that Trump won’t go through with his threats,” she added.

Former French Prime Minister Michel Barnier was displaced and replaced Earlier this month, while Chancellor Olaf Scholz lost a confidence vote on Mondaypaving the way for elections early next year.

“Imagine (Europe) as a soufflé, and the rising part of the soufflé was always France and Germany, and that has really collapsed into stagnation and paralysis,” said David Roche, strategist at Quantum Strategy, said CNBC earlier this month.

“The core of Europe (looks) incredibly bad economically and politically, and I think markets will reflect that at some point.”

Maximilian Uleer, head of European equity and cross-asset strategy at Deutsche Bank, said political uncertainty in Germany could actually trigger a turnaround the country’s weakening economyHowever.

“Germany is known for its political stability – there have only been two cases of coalition breakdown in recent history,” he said in a Dec. 16 note to clients. “Both times, Germany faced a recession, implemented reforms, and emerged stronger…Don’t underestimate Germany’s ability to transform.”