Our economic outlook for the euro area
May 21, 2025
Global trade developments brighten prospects for Europe
“The improved growth prospects and reduced risk of Chinese exports being rerouted to Europe decrease the risk of a material undershoot of the 2% inflation target.”
Shaan Raithatha,
Vanguard Senior Economist
Global trade developments have been positive for the euro area growth outlook. A U.S.-China tariff truce boosts global growth prospects and eases financial conditions, while initial U.S. agreements with the U.K. and China raise hopes for similar U.S.-euro area progress. We have increased our 2025 euro area growth outlook to just above 1%.
The improved growth prospects and reduced risk of Chinese exports being rerouted to Europe decrease the risk of a material undershoot of the 2% inflation target set by the European Central Bank (ECB). Domestic inflationary pressures remain subdued, with target-consistent progress being made on the most stubborn parts of services inflation.
Modest upgrades to our growth and inflation forecasts don’t change our view on the ECB policy rate. We continue to foresee two more quarter-point cuts this year, which would leave the deposit facility rate at 1.75% at year-end from its current 2.25%. That would be slightly below our estimate of the euro area’s neutral rate, or the interest rate level that would neither stimulate nor inhibit an economy.
Euro area economic forecasts
Notes: Values are approximate. GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Harmonized Indexes of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, as of December 2025. Monetary policy is the European Central Bank’s deposit facility rate at year-end.
Source: Vanguard.
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