ROME (ITALPRESS) – The euro area economy would expand modestly in the fourth quarter of 2024. Many of the trends observed last year continued in the first two months of 2025. This is highlighted by the European Central Bank in its Economic Bulletin.
The manufacturing sector continues to hold back growth although indicators based on business surveys point to improvement. High uncertainty, both domestic and international, limits investment and competitiveness challenges weigh on exports. At the same time, the service sector shows resilience. In addition, household income growth and labor market vigor support the gradual recovery of consumption, although consumer confidence remains fragile and savings rates high.
As of January 2025, the unemployment rate remained at a record low of 6.2 percent, and employment is estimated to have grown by 0.1 percent in the last quarter of 2024. However, labor demand has declined, and recent survey results point to moderate employment growth in the first two months of 2025.
“Persistently high levels of geopolitical and economic and trade policy uncertainty are expected to adversely affect the euro area economy, particularly investment and exports, slowing down its projected recovery after slightly lower-than-expected growth at the end of 2024,” the ECB stresses. “There is high uncertainty about both domestic and trade policies. Although the baseline projection scenario only includes the impact of new tariffs on trade between the United States and China, the negative effects of uncertainty about the possibility of further changes in global trade policies, especially vis-à-vis the European Union, are assumed to weigh on euro area exports and investment. This, together with persistent competitiveness challenges, would lead to a further decline in the area’s export market share. Despite these unfavorable circumstances, conditions remain for a renewed strengthening of the area’s GDP growth over the projection horizon. Rising real wages and employment in an environment of a vigorous, albeit weakening, labor market would support a recovery in which consumption continues to make a key contribution to growth. Domestic demand would also be supported by easing financing conditions, as market expectations about the future profile of interest rates suggest. The labor market would continue to show good resilience, with the unemployment rate averaging 6.3 percent in 2025 and falling slightly to 6.2 percent in 2027. Productivity would accelerate over the projection horizon, in a context where some of the cyclical factors that have led to a decline in the recent past begin to fade, though structural challenges remain.”
“Overall, the average annual real GDP growth rate is projected to be 0.9 percent in 2025, rising to 1.2 in 2026 and 1.3 in 2027. Compared with the macroeconomic projections for the euro area prepared in December 2024 by Eurosystem experts, the outlook for GDP growth was revised downward by 0.2 percentage points for both 2025 and 2026, while it remained unchanged for 2027. The weakening of the outlook is mainly due to downward corrections in export and, to a lesser extent, investment data, reflecting the greater-than-expected impact exerted by uncertainty, as well as the expectation that competitiveness challenges are likely to be more persistent than anticipated, the ECB explained. Structural and fiscal policies would increase productivity, competitiveness and the economy’s resilience. The European Commission’s initiative called Compass for Competitiveness provides a concrete plan of action, and the proposals it contains should be adopted promptly. Governments should ensure the sustainability of public finances in line with the EU’s economic governance framework, as well as prioritize fundamental reforms and strategic investments aimed at fostering growth.”
“The disinflation process continues. Inflation developments continued to broadly reflect expert expectations, and the macroeconomic projections for the euro area formulated in March 2025 by ECB experts are closely in line with previous inflation outlooks,” the ECB highlights.
Currently, experts place overall inflation, on average, at 2.3 percent in 2025, 1.9 in 2026 and 2.0 in 2027. The upward revision of overall inflation for 2025 reflects more vigorous dynamics of energy goods prices. For inflation net of the energy and food component, experts anticipate an average of 2.2 percent in 2025, 2.0 in 2026 and 1.9 in 2027.
Most measures of core inflation suggest that inflation will hover stably around the Governing Council’s medium-term target of 2 percent. Domestic inflation remains high, mainly because wages and prices in certain sectors are still adjusting to past inflation increases with considerable lag. Wage growth is moderating, in line with expectations, and profits are partially cushioning its impact on inflation.
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(ITALPRESS).
