Eurozone Economic Outlook for 2025

Investing.com – The Eurozone is set to see a weak start to 2025 after likely stagnating at the end of last year, according to analysts at Barclays (LON:BARC).

In a note to clients, the analysts led by Silvia Ardagna flagged “no signs of recovery” in the currency area’s manufacturing sector in December, with traditional powerhouse Germany in particular showing “significant” sluggishness. Surveys also indicated a decline in confidence among both businesses and consumers.

The analysts added they do not expect this pattern to reverse itself in the short term due to “rising uncertainty and cumulative signs of building slack in the labor market.”

Following “modestly positive but lackluster” growth in the final three months of 2024 — estimated at 0.2% quarter-on-quarter — the analysts projected real gross domestic product expansion at an equal rate in the first quarter this year, “mainly driven by a temporary rebound in exports” before the imposition of potential tariffs by US President-elect Donald Trump.

Meanwhile, a “notable deceleration” in year-over-year services price growth in the Eurozone is tipped to contribute to “sequential disinflation” in January. The analysts indicated that consumer prices, harmonized across the Eurozone, are expected to fall below the European Central Bank’s 2% medium-term target “for most of our forecast horizon.”

As a result, the ECB is expected to implement a series of 25-basis point cuts to interest rates until June, followed by two more reductions in September and December. The analysts predict the ECB’s terminal deposit rate to reach 1.5% by the end of 2025.

“Ultimately, we think a more accommodative policy stance than currently priced in financial markets will prevail if our growth and inflation forecasts materialise,” the analysts stated.

Speaking to an Austrian newspaper on Monday, ECB Chief Economist Philip Lane mentioned the central bank can ease policy further this year but must find a balance that neither induces a recession nor delays curbing inflation. The ECB cut interest rates four times last year, and markets expect another four reductions in 2025.

“If interest rates fall too quickly, it will be difficult to bring services inflation under control,” Lane remarked, as quoted by Der Standard. “But we also don’t want rates to remain too high for too long because that would weaken the inflation momentum, causing disinflation to possibly fall below target.”

The comments come as investors begin to question whether the Federal Reserve will cut rates in 2025 after having reduced borrowing costs by a full percentage point last year. Fed officials have taken a “careful” approach to further cuts due to uncertainties surrounding Trump’s trade policies, with a strong US jobs report last week dampening expectations for reductions this year.