Our economic outlook for the euro area
December 05, 2024
Our outlook for year-end 2025
0.5%
Economic growth,
year over year
The euro area economy experienced a modest recovery in 2024, following a year of stagnation in 2023. However, concerns about growth remain heightened. Manufacturing faces headwinds due to lingering effects from the energy crisis and weakening external demand. Restrictive fiscal and monetary policies are slowing the services sector. We expect below-trend growth in 2025 with a potential slowdown in global trade representing a key risk.
1.9%
Core inflation, year over year
Disinflation has been strong and fast. Since reaching a peak of 10.6% in October 2022, annual inflation has dropped over 8 percentage points. Core inflation remains slightly elevated because of the slower-moving services component. But amid weak growth, we expect both headline and core inflation to end 2025 below 2%.
1.75%
Monetary policy rate
We expect the European Central Bank to bring its policy rate below neutral in 2025, ending the year at 1.75%. Risks to this outlook skew to the downside. An intensification of trade tensions and a significant slowdown in global growth would each likely result in a more dovish monetary policy stance.
6.9%
Unemployment rate
With a pronounced slowdown in Germany and broader growth pressures, we foresee the unemployment rate rising to the high-6% range through 2025. Euro area economies have struggled recently with weak productivity growth. Finding a way to rejuvenate productivity is vital to the long-term outlook. Advances in artificial intelligence and a stated desire by governments to reduce red tape are encouraging. In 2025 and 2026, we anticipate a modest recovery in productivity growth and a moderation in the growth of hours worked.
What I’m watching
Weakness in the industrial heart of Europe
The euro area’s biggest economy contracted in 2023 and is likely to do so again in 2024, weighed down by weakness in manufacturing. Germany’s industrial sector has suffered from both higher energy prices, triggered by the war in Ukraine, and a slowdown in external demand, particularly from China. A reversal of those headwinds may be the surest route to the stabilization—and eventually the recovery—of German manufacturing, which will be an important ingredient in a wider euro area recovery.
Shaan Raithatha, CFA
Vanguard Senior Economist
German industrial production
Notes: The chart shows the German Industrial Production Index alongside sub-indexes for energy-intensive and China-exposed production sectors from January 2021 through July 2024. All indexes are adjusted to have a starting value of 100 at the beginning of 2021. Energy-intensive sectors include chemicals, base metals, paper products, and refined petroleum. China-exposed sectors include manufacturing, electrical, and motor vehicles. The weights represent the share of revenue generated by the sectors in relation to the total revenue generated by German industrial production.
Sources: Vanguard calculations, based on German Federal Statistical Office data from Bloomberg.
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