The 2025 outlook for the euro area economy is forecast to be challenging amid trade uncertainties with the US and ongoing fiscal tightening. But the region is predicted to avoid recession.
The euro area economy is predicted to expand 0.8% in 2025, compared with the consensus forecast of economists surveyed by Bloomberg indicating 1.2% growth. German GDP is expected to contract 0.3% and France’s economy will shrink by 0.7%, while Spain’s GDP (again outperforming) will increase by 2%, according to Chief European Economist Sven Jari Stehn.
US President-elect Donald Trump’s planned tariffs are likely to weigh significantly on growth, with much of the drag stemming from higher trade policy uncertainty, Stehn writes in the team’s report, which is titled “Euro Area Outlook 2025: Under Pressure.” Although the region’s economy is expected to expand in the coming year, there’s a 30% chance of a significant recession.
While the size of any US tariffs is highly uncertain, Goldman Sachs Research finds that much of the drag to growth will come from higher trade policy uncertainty, rather than the actual tariff increases themselves. “Trade policy uncertainty measures have already been on the rise,” Stehn writes.
Europe’s manufacturing sector also faces structural headwinds. Energy prices have fallen markedly from their peak, but European gas prices remain notably above pre-2022 levels and are materially higher than in the US. China has emerged as a key competitor to European goods production, gaining material market share in industries that have seen cost increases.
Slow GDP growth will likely result in a softer job market next year. The unemployment rate, at 6.3% in September, is forecast to rise next year and to reach 6.7% by early 2026. Wage growth is projected to slow. “A softening labour market supports our view of cooling wage growth,” Stehn writes. “Following notable upside surprises early in the year, pay pressures have now cooled meaningfully.”
“The outlook for inflation, however, remains notably uncertain,” Stehn writes. Depreciation in the euro could indicate stickier-than-expected inflation pressures. On the other hand, inflation could be more subdued amid a weakening job market and in the event of higher-than-expected US tariffs on China, which could incentivise China to sell excess goods at reduced prices into Europe.
Read the full article here / Courtesy of Goldman Sachs Outlooks
