Eurozone Growth Rebounds in 2024, but Trade and Manufacturing Risks Remain

Euro area GDP increased by 0.9% in 2024, nearly doubling the pace of 2023, but challenges in manufacturing and global trade cast uncertainty over the outlook. The ECB remains focused on maintaining stability through cautious policy decisions and close monitoring of external risks.

Steady Recovery with Uneven Momentum

The euro area economy posted a modest recovery in 2024, with gross domestic product (GDP) growing by 0.9%, nearly twice the pace of the previous year. However, momentum slowed toward the end of the year, and early indicators for 2025 show continued weakness in manufacturing, investment hesitancy, and export-related challenges.

Despite headwinds, the services sector has remained resilient, buoyed by rising household incomes and a robust labor market, which continues to support consumption. According to the European Central Bank (ECB), GDP is expected to grow by 0.9% in 2025, followed by 1.2% in 2026 and 1.3% in 2027.

Inflation Moderates as Wage Growth Stabilizes

Headline inflation in the eurozone continues to decline, falling from 2.5% in January to 2.3% in February, largely due to easing energy costs. Core inflation, which excludes volatile items such as food and energy, also edged lower, reflecting broader price stability.

After a surge in wage growth during the inflationary peaks of previous years, real wages are now stabilizing, and wage increases are moderating, helping to ease inflationary pressure. The ECB projects inflation will reach its 2% target by early 2026.

ECB Policy Shift: Rate Cut Signals Easing Bias

In a significant monetary policy adjustment, the European Central Bank reduced its key interest rates by 25 basis points, lowering the deposit facility rate to 2.50%. The rate cut, the ECB’s sixth in the current cycle, is aimed at making borrowing more affordable and stimulating economic activity, despite subdued lending trends.

ECB officials reiterated their data-dependent, meeting-by-meeting approach, emphasizing that future policy moves will hinge on evolving economic and inflation data.

Trade Policy Risks Loom Over Outlook

Mounting concerns over global trade tensions are adding to uncertainty. A 25% U.S. tariff on European imports, recently proposed by the U.S., could reduce euro area GDP growth by 0.3 percentage points in its first year, according to ECB estimates. If the EU responds with retaliatory tariffs, the economic impact could deepen, potentially lifting inflation in the short term before stabilizing.

Strategic Priorities: Integration and Resilience

In response to external risks, the ECB is urging policymakers to strengthen the EU’s Single Market and accelerate the completion of pending trade agreements. Enhanced intra-EU integration and global trade partnerships are seen as essential for reinforcing the region’s economic resilience and mitigating the fallout from rising protectionism.

The ECB emphasized its commitment to safeguarding price stability and supporting economic growth with flexible policy tools ready to respond as necessary.

Source: European Central Bank (ECB)