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The Eurozone economy unexpectedly stalled in the fourth quarter, increasing the pressure on the European Central Bank to implement more aggressive interest rate cuts this year.
The zero growth in the quarter fell short of the modest 0.1 per cent expansion forecasted by economists surveyed by Reuters and the 0.4 per cent growth in the previous quarter. For 2024, the Eurozone economy grew by 0.7 per cent, as per data released by Eurostat on Thursday.
The data was released just hours before the ECB reduced its benchmark interest rate by a quarter-point to 2.75 per cent, the lowest level since early 2023.
“The economic outlook for the region is bleaker than anticipated by many,” stated Jack Allen-Reynolds at Capital Economics. “We anticipate this will prompt the ECB to implement more interest rate cuts this year than what is currently expected in the market.”
The stagnation highlights the difficulties facing the region as Germany, the largest economy in the Eurozone, grapples with a severe decline in manufacturing and political instability.
German GDP contracted by 0.2 per cent in the final quarter of 2024 compared to the previous quarter, while France’s economy unexpectedly shrank by 0.1 per cent. Italy’s output remained unchanged.
Consumers across much of Europe have remained cautious even after a decrease in inflation following a period of price surges that led central banks globally to raise rates.
Spain was an exception, with GDP increasing by 0.8 per cent in the fourth quarter compared to the previous three months, making it an outlier among the major economies in the Eurozone.
Traders are predicting that the ECB will implement another two or three quarter-point cuts this year, based on levels implied by swaps markets.
The euro, which has weakened in recent months due to diverging monetary policies between the US and Eurozone, remained relatively steady at $1.042 in late afternoon trading.
Separate data from Eurostat indicated a slight weakening in the labor market, as the Euro area unemployment rate rose to 6.3 per cent in December, up from 6.2 per cent in November.
“Weakness surrounds us while other major economies are experiencing growth,” noted Bert Colijn, an economist at ING.
The deteriorating situation in the Eurozone contrasts with the US, where the IMF forecasts a growth rate of 2.7 per cent this year, similar to that of 2024. The US Federal Reserve opted to keep interest rates unchanged on Wednesday, with Chair Jay Powell describing the economy as “overall strong” and labor market conditions as “solid”.
US President Donald Trump strongly criticized the Fed’s decision to maintain rates.
Economists cautioned that the imposition of US tariffs on European goods could further challenge the Eurozone. This threat comes amidst heightened political uncertainty as Germany prepares for elections on February 23.
A 10 per cent US tariff on all Eurozone imports, coupled with increased uncertainty regarding future US-EU trade relations, could reduce Eurozone growth by 0.3-0.5 percentage points within a year, according to Holger Schmieding, chief economist at Berenberg.
For the ECB, Schmieding stated, “this would be a reason to reduce rates below 2.25 per cent, which is our current projection for the deposit rate”.
Additional reporting by Ian Smith