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The Eurozone economy unexpectedly hit a plateau in the last quarter, intensifying the pressure on the European Central Bank (ECB) to adopt a more aggressive stance on interest rate cuts this year. Instead of the modest 0.1 percent increase that economists anticipated — based on Reuters’ poll — and the 0.4 percent growth seen in the third quarter, there was no growth at all.
Eurostat data released on Thursday indicated that the Eurozone managed only a 0.7 percent growth for 2024. These figures dropped shortly before an expected ECB announcement, hinting at a benchmark interest rate cut by a quarter-point to 2.75 percent — the lowest since early 2023.
According to Jack Allen-Reynolds from Capital Economics, “The region’s economic prospects are grimmer than widely assumed. We foresee this prompting the ECB to enact deeper rate cuts this year than what investors currently predict.”
The stagnant economy highlights the challenges faced by the region, especially with Germany — the Eurozone’s powerhouse — grappling with a significant manufacturing slump and political unrest. In the last months of 2024, Germany’s GDP decreased by 0.2 percent quarter-over-quarter, France’s economy unexpectedly shrank by 0.1 percent, while Italy saw no growth.
Many European consumers are still wary despite inflation easing after last year’s price surges which pushed central banks worldwide to hike rates. Spain, however, stood out with a 0.8 percent GDP increase in the fourth quarter, marking it as an anomaly among major economies utilizing the single currency.
Following the recent data release, traders ramped up expectations for the ECB to implement four rate cuts this year as per the swaps market. Meanwhile, the euro, which has seen a decline recently due to diverging monetary policies between the US and Eurozone, held steady at $1.041.
Eurostat also reported a slight dip in the job market, with the Euro area unemployment rate inching up to 6.3 percent in December from 6.2 percent in November.
“While we are seeing weaknesses everywhere, other major economies continue to grow,” remarked Bert Colijn, an economist at ING.
This bleak outlook for the Eurozone stands in contrast to the US, which the IMF predicts will grow by 2.7 percent this year, consistent with its pace in 2024. The US Federal Reserve recently kept interest rates steady, with Fed Chair Jay Powell describing the economy as “strong overall” and labour market conditions as “solid.”
US President Donald Trump has been vocal in his disapproval of the Fed’s decision to maintain rates.
Economists warn that potential US tariffs on European goods could exacerbate the struggles facing the Eurozone. This threat looms amid heightened political uncertainty with upcoming German elections scheduled for February 23.
Holger Schmieding, chief economist at Berenberg, suggested that a 10 percent US tariff on all imports from the Eurozone, alongside increased uncertainty about US-EU trade relations, could potentially slice 0.3-0.5 percentage points off Eurozone growth within a year. He added that for the ECB, “this would necessitate rates falling below the 2.25 percent level, which we currently see as the lowest point for the deposit rate.”
Reporting contributed by Ian Smith.
