Euro area outlook: Another year brings old and new challenges

2024 proved to be a challenging year for the euro area and there are plenty of reasons to believe that 2025 will present yet another set of fresh new challenges . These range from US tariffs, fiscal consolidation and a potential escalation in trade tensions with China. In addition, there is uncertainty with respect to the outcome of the elections in Germany and the political path taken in France. Bu t just as the euro area managed to grow, albeit only moderately, in 2024 we expect it to continue to grow in 2025. More specifically we are forecasting growth of 1.1% for 2025 and 1.2% in 2026. Our forecast rests on the assumption that Trump’s trade policy will turn out to be “more bark than bite” and that fiscal consolidation will, for the euro area aggregate, only take place in a homeopathic dose. Solid real income growth will drive private consumption . E xport growth, after a significant undershooting in 2024, should also recover somewhat , as will housing investment. The biggest uncertainty surrounds corporate investment spending , as positive cyclical factors such as lower funding costs and a stabilisation of profit growth might be overshadowed by structural weakness. It thus remains crucial in assessing the growth outlook to what extent governments across the region, and particularly in Germany, are willing to address the many structural problems the euro area faces.