The quarterly growth of 0.4% in the third quarter suggested that a (slight) recovery of the European economy was within reach. Zero growth in the fourth quarter breaks these hopes, at least temporarily.
It is unsurprising that Germany and France, the two largest economies in the euro area, are pulling the average down. Both countries experienced a slowdown in activity at the end of the year, as they are experiencing political instability and lack of visibility for the future, undermining economic agents' confidence.
Italy is stagnating, and the strongest quarterly growth is in the Iberian peninsula (+1.5% in Portugal, +0.8% in Spain).
Growth was 0.7% for the whole of 2024. This gloomy environment has stopped the downward trend in unemployment, which reached a record low of 6.2% in November and rebounded slightly in December to 6.3%.
A slight improvement is expected for the current year and next as cheaper credit helps boost demand. Nevertheless, growth in the euro area is not expected to exceed 1.2% in 2025 and 1.4% in 2026. The European investor, therefore, has every interest in diversifying his portfolio to look elsewhere for growth that will remain disappointing in our countries. We invest in the euro area through individual shares.
Credit is becoming cheaper in the eurozone
In response to this deterioration in the economic situation, the European Central Bank has revised its key interest rates downwards by 0.25%, as expected.
The ECB's interest rate on the deposit facility was 2.75%, and its interest rate on refinancing operations was 2.9%. The ECB’s reasoning is quite clear: with inflation stabilised at 2.4% in December, it gives priority to faltering growth. Unless inflation changes the data, the ECB will, therefore, continue its downward cycle in the coming months, hoping to revive demand. Key interest rates will fall again several times from 1.5% to 2.0%.
Beware, however, the ECB is not alone in the world. The lower interest rates in the euro area may widen the rate differential that separates them from the US. This would weaken our currency and risk boosting inflation through the prices of imported goods, especially energy.
Another problem is that while policy rate cuts impact short-term rates, their impact on long-term rates is less visible. Since June 2024, the ECB has reduced its key interest rates five times, from 4.5% to 2.9%, for a total decrease of 1.6%. Yet, across the eurozone, 10-year bond rates are almost identical to those of June 2024. This indicates that the European Central Bank has difficulty weighing on longer maturities.
Undoubtedly, our monetary authorities will do what they can to stimulate growth. Still, it would be illusory to think that they have a magic wand that can solve everything or that monetary policy is the main obstacle to a euro area recovery at this stage.