Our economic outlook for the euro area
April 25, 2025
Our outlook for year-end 2025
Less than 1%
Economic growth,
year over year
The announced imposition of U.S. tariffs on euro area goods would counteract gains in economic growth that we had expected from Germany’s infrastructure and defense program as well as a broader increase in defense spending across Europe. We anticipate that the effective tariff rate on euro area goods will rise to around 15% this year, which would pull down economic growth. High-frequency survey data have corroborated early signs that activity will be weaker in the months ahead. We recently lowered our forecast for 2025 euro area growth to below 1% and for 2026 growth to around 1%. Euro area GDP grew by a seasonally adjusted 0.2% in the fourth quarter of 2024, down from 0.4% third-quarter growth.
Just under 2%
Core inflation, year over year
We expect the tariff environment to lead to softening inflation in the medium term as growth falls below potential. The new prevailing risk is of a material undershoot of the 2% inflation target set by the European Central Bank (ECB). Such an undershoot would be driven by a drag on growth from reduced euro area exports and higher uncertainty, the potential increase in volume of low-cost imported goods from China, and a stronger euro.
1.75%
Monetary policy rate
The ECB lowered its deposit facility rate by 25 basis points to 2.25% on April 17, the sixth consecutive quarter-point cut and seventh such cut overall in a rate-cutting cycle that began in June 2024. We foresee two further ECB policy rate cuts this year, to a 1.75% year-end rate, as the euro area’s growth and medium-term inflation outlooks have weakened amid elevated tariff-related uncertainty.
Around 6.5%
Unemployment rate
We expect momentum in the labor market to stall amid a deteriorating growth outlook and the unemployment rate to rise from its current record low of 6.1%.
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