Euro Area: Economic Outlook for 2024 and Beyond

The euro area has faced a challenging economic landscape in recent years, characterized by sluggish growth compared to other Western economies. As we look towards 2024, the eurozone is projected to experience a slight expansion, with GDP growth estimated at around 0.8%, following a modest 0.4% in 2023. This growth, albeit slow, can be interpreted as a sign of resilience in the face of monetary policy tightening and ongoing geopolitical uncertainties.

Divergent Growth Patterns

A closer examination reveals significant sectoral divergences within the euro area. The capital-intensive industries have been particularly hard hit by rising interest rates and economic uncertainty, leading to declines in investments in machinery, equipment, and construction. In contrast, the services sector, which is more labor-dependent, has shown moderate growth. Countries with a higher concentration of manufacturing, such as Germany, Austria, and Finland, have struggled more than their service-oriented counterparts like Spain, which has benefitted from a robust services sector.

Private consumption recovery in 2024 has been less dynamic than anticipated, primarily due to increased saving intentions among households. The eurozone’s savings rate reached 15.7% in the second quarter of 2024, significantly higher than the pre-pandemic level of approximately 12.5%. Despite a recovery in consumer confidence, the combination of elevated uncertainty and higher interest rates has led households to prioritize savings over spending.

Investment trends in 2024 have been disappointing, with contractions observed across various sectors. However, government consumption, particularly in inflation-mitigating measures and increased defense spending, has provided some support to economic activity. Additionally, net exports have contributed positively to GDP growth, albeit marginally.

Looking Ahead to 2025

As we move into 2025, the euro area is expected to continue its gradual recovery, driven primarily by private spending. Factors such as recovering purchasing power, high savings, lower inflation, and stable labor markets are anticipated to bolster consumer expenditure. However, a shift in consumer behavior from saving to spending will be crucial for sustaining this growth.

The interplay between monetary and fiscal policy will play a significant role in shaping the economic landscape in 2025. A less restrictive monetary policy is likely to stimulate economic activity by reducing incentives to save and easing financing conditions for investments. Conversely, fiscal impulses are expected to be limited as many euro area economies focus on consolidating public finances and withdrawing supportive measures aimed at mitigating high inflation. Consequently, government consumption is projected to contribute less to GDP growth.

The Next Generation EU program is poised to support investment activity, particularly in countries that can effectively leverage these funds. However, the impact of these funds will vary significantly across member states, depending on their respective shares.

Foreign demand is also expected to provide some support to economic activity, although only marginally. While growth rates in many non-EU countries are projected to moderate, intra-EU trade is expected to pick up, leading to an increase in exports. However, imports are likely to rise as well, resulting in a neutral contribution from net exports to GDP growth.

Inflation is projected to soften slightly, decreasing from 2.4% in 2024 to 2.1% in 2025, as high service inflation levels are expected to moderate amid weakening wage growth. Overall, real GDP growth in the euro area is anticipated to increase slightly from 0.8% in 2024 to 1.2% in 2025, though these projections come with considerable uncertainty, particularly regarding household saving incentives and trade developments amid ongoing geopolitical tensions.

Italy: Economic Performance and Challenges

In 2024, Italy’s economy continued to experience a slowdown, with moderate growth primarily driven by the services sector. The manufacturing and automotive sectors faced persistent weaknesses, contributing to low consumer and business sentiment. Aggregate demand saw some support from consumption, bolstered by a recovery in real household disposable income, moderate inflation, and improved access to consumer credit. However, consumer price inflation is expected to remain low at 1.6%, with GDP growth projected to strengthen moderately to around 1% in 2025.

The services sector, particularly tourism, has been a key driver of Italy’s GDP growth, supported by foreign tourists. Total tourism spending increased, primarily due to higher average spending per tourist. However, domestic consumption remains weak, reflecting the broader economic challenges.

On the supply side, the industrial sector has struggled, with significant contractions in production, particularly in the automotive and fashion industries. The construction sector, after experiencing extraordinary growth, is expected to face challenges due to reduced tax credits for housing renovation.

Real household disposable income has increased, driven by employment expansion and wage growth, but consumption has only recovered moderately due to households prioritizing savings. Inflation in Italy has slowed, but energy prices remain high, impacting competitiveness.

Looking ahead, Italy’s economy is expected to maintain moderate positive growth in 2025, supported by a recovery in consumption and exports, although challenges remain, particularly in the manufacturing sector.

Germany: A Year of Uncertainty

Germany’s economic outlook for 2025 is marked by uncertainty, with a slight recovery anticipated amid ongoing challenges. The federal election in February is expected to shift economic policy priorities, while a new EU Commission and US administration will also influence the economic landscape. Despite expectations of falling interest rates, growth levels are projected to remain modest.

In 2024, the German economy faced disappointment, with stagnation in private consumption and declining investments. The industrial sector, in particular, struggled, with production falling significantly below pre-pandemic levels. The services sector, however, remained stable, contributing to a slight contraction in GDP.

Monetary policy is expected to play a crucial role in the recovery, with interest rate cuts anticipated to stimulate demand for loans. However, investment intentions remain subdued, with companies hesitant to increase spending amid high uncertainty.

Consumer fundamentals appear promising, with declining inflation and rising real incomes. However, high uncertainty has dampened consumer spending, although signs of recovery have emerged in recent months. Exports have also struggled, with performance heavily dependent on trade relations with the US and China.

Overall, Germany’s growth rate for 2025 is expected to be around 0.7%, reflecting ongoing structural challenges and the need for economic policy reforms to drive more dynamic growth.

France: Navigating Economic Challenges

France’s GDP growth in 2024 is estimated at 1.1%, driven by public consumption, investment, and foreign trade. The trade balance has improved, contributing positively to growth, although private demand has remained sluggish. The Paris Olympic Games provided a temporary boost to GDP, but this effect is expected to dissipate.

In 2025, GDP growth is projected to slow to 0.9%, with private demand becoming the main growth driver. Rising nominal wages are expected to boost household purchasing power, while falling interest rates may encourage spending. However, rising unemployment could weigh on private demand, and business investment is anticipated to remain sluggish.

Public measures that supported growth in previous years are being withdrawn, which could negatively impact economic activity. The labor market has shown resilience, but job creation has slowed, and unemployment may rise in 2025.

France’s public deficit remains a concern, with measures being implemented to reduce it. The economic outlook for 2025 appears challenging, with significant risks stemming from political instability and international geopolitical tensions.

Spain: A Bright Spot in the Eurozone

Spain’s economy has outperformed expectations, with growth projected at about 2.5% in 2025, double the eurozone average. The country has benefitted from the resilience of the services sector, with manufacturing also showing positive signs. Consumption is expected to be the main driver of growth, supported by employment and wage growth, alongside lower interest rates.

Inflation is expected to stabilize around the European Central Bank’s target of 2%, while wages are projected to rise by about 3%. Public spending has contributed to growth, but this is expected to moderate as the effects of recent crises abate.

Investment is anticipated to recover in 2025, although lingering uncertainty may dampen business activity. Exports are expected to contribute to growth, although tourism export growth may moderate following strong performance in previous years.

The Nordic Region: Mixed Prospects

The Nordic region is expected to grow by approximately 2% in 2025, with each country facing its own unique challenges. Sweden is projected to grow by around 2%, driven by private consumption and investment recovery. Norway is expected to see growth supported by investment in non-oil sectors, while Denmark’s growth may be impacted by trade uncertainties.

Finland, as the only Nordic country in the eurozone, faces challenges related to geopolitical tensions with Russia. Iceland is projected to recover from a slowdown, although high inflation and interest rates remain concerns.

Poland: Resilience Amid Challenges

Poland’s economy is expected to grow by 3.5% in 2025, driven by domestic demand and a strong labor market. Despite challenges such as elevated inflation and a large public deficit, Poland has demonstrated resilience in the face of external pressures.

The economic outlook for Poland remains positive, with significant room for continued convergence and growth. However, challenges such as an aging population and geopolitical uncertainties will require careful management.

United Kingdom: A Sluggish Recovery

The United Kingdom’s economic recovery has lost momentum, with growth projected to pick up slightly from 0.8% in 2024 to 1% in 2025. Despite a tight labor market and rising real wages, consumer demand remains tepid, influenced by high inflation and cautious sentiment.

The government’s commitment to public investment is expected to support growth, although rising taxes may dampen corporate confidence. Monetary easing is anticipated to contribute to the recovery, but external factors and geopolitical uncertainties pose risks to the outlook.

In summary, the euro area and its member states face a complex economic landscape in 2024 and beyond, characterized by divergent growth patterns, sectoral challenges, and the interplay of domestic and international factors. Each country will need to navigate its unique challenges while leveraging opportunities for growth in an increasingly uncertain environment.