2024 was marked by further progress in disinflation, in both the United States and the Eurozone, sufficient to pave the way for rate cuts. However, 2025 may be quite different from 2024, with expected divergent inflation trajectories between the United States and the euro area and, therefore, a decoupling of monetary policies (extended status quo for the Fed, continued gradual rate cuts for the ECB).
The upcoming protectionist shift in the United States, the structural difficulties in industry and the political instability in France and Germany will limit the eurozone's economic growth margins in 2025. However, the labour market is holding up well in many countries (the unemployment rate in the eurozone is still at a record low level). In addition, some of the shock will be cushioned by inflation falling back down to its target level and by the continued cycle of interest rate cuts. Under these conditions, there is still anticipation of a slight increase in eurozone economic growth in 2025, to 1.0%, which will, again, be underpinned by significant differences in growth levels between Member States.
After outperforming between 2005 and 2018, German growth has since underperformed. Germany is the only major European economy to have seen its GDP stagnate for the third year in a row, due to the weakness of its industry (reflected this year in site closures and a moderate upturn in unemployment). The relative persistence of inflation and a fiscal policy limited by the debt brake rule are also weighing on the recovery potential. Finally, at a time when Germany is already being penalised by a lack of investment and high energy costs, it is vulnerable to a possible increase in US tariffs.
France's economic growth is set to slow over the next two years, and the unemployment rate is set to rise, at a time when the gains in purchasing power associated with disinflation are behind us and political uncertainty is likely to weigh heavily. A difficult period that could be cushioned by a rebound in aeronautical production, but which could also see the materialistion of downside risks weighing on trade opportunities in Germany and the United States. One of the challenges for France will be to achieve fiscal consolidation without affecting its attractiveness, and in particular the ability of its labour market to create jobs when the recovery takes hold.
In Q3 24, real GDP remained unchanged. Domestic demand added 0.5 percentage points to the overall growth, while the net exports contribution was negative. The economic slowdown reflects the disappointing performance of manufacturing (-1.3%), while the services value added rose 6.5% above pre-crisis level. Italian exports have been declining in the last year and a half. The potential implementation of new measures to protect US production by the new US administration might have a significant impact on the Italian production system. The Italian trade surplus with the US in the first eight months of 2024 stood at EUR 26.5 bn, about 70% of the overall trade surplus.
Spain's outperformance is set to continue throughout our forecast horizon. Private consumption is expected to remain the driving force behind GDP growth, buoyed by slowing inflation and a strong labour market. The contribution of foreign trade is expected to fall due to an anticipated increase in imports and the potential second-round effects of higher US customs tariffs on Spanish exports. Investment is expected to recover, buoyed by NGEU funds and monetary easing. Finally, even though there is no draft budget for 2025, fiscal consolidation is expected to continue over the next two years.
Following a period of economic stagnation in 2023, Dutch growth gathered momentum in 2024 on the back of solid consumer confidence and more favourable financial conditions thanks to the ECB interest rate cuts. At the same time, the Dutch labour market remains tight, with plenty of unfilled jobs; this should lead to stronger real-wage gains, thereby further supporting private consumption. While business investment has been declining since the start of 2023, there is hope that it will gradually recover in 2025 in line with additional monetary policy easing, which is expected in Europe. Public investment growth is also set to remain quite supportive implying a larger government deficit
Belgian economic growth remains somewhat below but close to trend. Our nowcast for the 4th quarter indicated 0.3% QoQ growth. Domestic demand will have to continue to offset a negative contribution from net exports at a time when declining demand for specific products and a challenging external environment weigh down on the trade balance. Whereas, last year, firms’ investment spending took on the role of growth engine, private consumption is now slowly returning to center stage. A pressing need for fiscal consolidation should hold back further increases in government outlay.
Key figures for the French economy compared with those of the main European countries, analysis of data on the population and the French labour market, activity by sector, publication administration figures, inflation, credit and interest rates, corporate and household accounts.
The ECB is still keeping control of things. This was the general message from Christine Lagarde at her press conference on Thursday 12 December. As expected, the ECB cut its key rates by 25 basis points for the fourth time since monetary easing began in June, taking the refinancing rate down to 3.5% and the deposit facility rate down to 3.0%. Inflation forecasts have been lowered slightly, with the forecast brought down to 2.1% for headline inflation and 2.3% for core inflation, before the two measures converge at 1.9% in 2026.
The eurozone’s net international investment position in terms of direct and portfolio investment recovered significantly between 2015 and 2022, becoming positive from 2021 onwards, meaning that the eurozone has become a net creditor to the rest of the world. However, the income it receives from these assets is lower than the income it pays to non-resident investors. What are the reasons for this?
The PMI indicator for the manufacturing sector fell further into contraction territory in November, down from 46 to 45.2. In particular, the employment index hit its lowest level since August 2020 (45.3). The momentum in services also reversed, with the PMI indicator slipping back below 50 in November, to 49.2. In addition, consumer confidence deteriorated in November (-1.2 points to -13.7, according to the European Commission's flash index) and only marginally increased in the second half of the year.
According to the latest business climate and household surveys, the German economy is unlikely to rebound for some time yet. In November, the IFO business climate index (85.7) has returned to a level close to its level in September (85.4, its lowest level since May 2020), following a one-off rebound in October (86.5). This return to a low level is mainly explained by the services index in an uncertain political context, with the ousting of Finance Minister C. Lindner suddenly sending Germany into a pre-election period (early elections scheduled for 23 February 2025).
The French economy is deteriorating, as evidenced by the business climate and household confidence. The INSEE composite business climate index is down by one point a month, from 98 to 96 between September and November (long-term average at 100). This deterioration can be seen across all sectors, including services, underlining the fact that the cooling has spread throughout the economy.
L’activité économique italienne surprend à la baisse en cette fin d’année. Au troisième trimestre, la croissance est restée au point mort (0,0% t/t). Bien que les premiers indicateurs conjoncturels suggèrent qu’elle devrait être plus positive au T4 (0,4% t/t d’après nos prévisions), cela ne permettrait finalement pas à l’Italie de surpasser la zone euro cette année (croissance annuelle moyenne estimée à 0,5% en Italie, versus 0,8% en zone euro).
The end of the year is shaping up to be as dynamic as it has been all year in Spain. After posting even greater growth than expected in Q3 (0.8% q/q compared to an anticipated level of 0.6%), the first available data for Q4 unsurprisingly indicate that the Iberian country will remain at the head of the pack for the four major euro zone economies. According to our forecasts, real GDP should grow by a further 0.7% q/q in the final quarter of the year, bringing average annual growth to 3.0%.
In France and in Germany, a further surge in inflation is expected in November, taking it to 1.8 and 2.6% y/y, respectively, according to our forecasts, compared to 1.6 and 2.4% in October and 1.4 and 1.8% in September (Eurostat harmonised index). Headline inflation is still relatively high due to persistent inflation in services.
In Central Europe, economic activity slowed in Q3 2024. Over the first three quarters, the Polish economy performed better than its neighbours. In the region, inflation has picked up again and a return to the inflation target is not expected until 2026. With the exception of the Czech Republic, all Central European countries are under excessive deficit procedure. Moreover, several countries have tapped international capital markets. This is accompanied by a higher currency risk, but generally, Central European countries have adopted a cautious management of foreign currency debt. Meanwhile, capital flows rebounded in Q3. The region remains an attractive destination for short-and medium-term capital flows.
In 2024, Hungary is expected to be among the region’s worst performing economies, entering a technical recession in Q3. Real GDP growth is one of the government’s priorities, with an official target of 3% to 6% next year. The budget for 2025 recently submitted to Parliament aims at both revitalising the economy and consolidating public accounts. However, medium-term potential growth, estimated at 3% by the IMF, has been revised upwards compared to its 2019 estimate. In particular, it is buoyed by favourable prospects for FDI, particularly from China, which would support investment.
While the German economy continues to underperform and France remains in a middle ground, Southern European countries have become the driving force behind economic momentum in the Eurozone.
In Spain, Italy and Portugal, the five largest banking groups recorded, on average and on a consolidated basis, an annualised return on average equity (ROAE) of 15.0%, 15.6% and 18.1%, respectively, in the first three quarters of 2024. These are levels not seen since 2007.
After a long, unfavourable period of low rates lasting almost six years, European banks have seen their interest margins and profitability improve overall with the rise in ECB rates in 2022 and 2023. As we now enter a period of falling rates, Laurent Quignon talks to us about their effects on the interest margins of European banks.
Last week’s news made for grim reading for many in Europe. First came the choice by our American friends to bring back to the White House a man who said just weeks ago that the EU would have to “pay a big price” if he won. Then the German governing coalition collapsed. Following factory closure announcements by VW in Germany a week before, the two largest German banks reported massive increases in their provisions for bad loans. Meanwhile, in France, lay-offs were announced by two high profile French companies in the automotive industry but also in retail a sector hitherto thought to be fine
In France, in Q3 2024, for the first time (statistical series dating back to 1949), non-financial companies invested more (in billions of euros, at constant prices) in "information and communication" than in construction. This shift was bound to happen sooner or later, given the trend towards intangible investment (in which "information and communication" is the main item). In particular, this growing weighting goes hand in hand with the increasingly widespread use of electronics and software in today's goods, including in traditional sectors such as the automotive industry.
