Economic Outlook for Europe in 2025

Goldman Sachs warns that 2025 may be another tough year for European economies, as outlined in a Friday note.

Contributing Factors

The firm highlights several reasons for this anticipated slowdown:
– Tariffs proposed by US President-elect Trump.
– Structural challenges in manufacturing.
– Ongoing fiscal consolidation across the euro area.

Growth Projections

Goldman projects:
– Euro area: 0.8% growth
– UK: 1% growth

Both figures are below market consensus.

Labor Market Trends

The euro area’s labor market has been more resilient than expected this year; however, wage growth has slowed as adjustments align with previous price hikes.

Inflation and Interest Rates

Following a significant cooling of underlying inflation post-summer, the European Central Bank (ECB) cut policy rates by 100 basis points over the year. Goldman predicts an additional 25 basis point reduction to 1.75% by next July, with potential for more cuts if conditions worsen.

In the UK, wage growth and services inflation remain high, leading the Bank of England (BoE) to be more cautious relative to other central banks. The BoE has reduced the Bank Rate twice this year, with more quarterly cuts expected in 2025 due to a weakening labor market cooling inflation.

2024 Economic Performance

2024 was sluggish for both the euro area and the UK. Although early in the year showed some economic promise – with increased real incomes and improved financial conditions – growth stalled after mid-year.
Cautious consumer spending, high energy prices, and intensified competition from China hampered performance, causing economic expansion in Europe to lag behind the U.S. once more.