Euro Area to See Consumer Pickup But Risks Are High, EU Says

The euro area’s economic growth will pick up as obstacles to consumption and investment fade away, though geopolitics poses an increasing threat, according to the European Commission.

Author of the article:

Bloomberg News

Alexander Weber

Published Nov 15, 2024  •  3 minute read

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(Bloomberg) — The euro area’s economic growth will pick up as obstacles to consumption and investment fade away, though geopolitics poses an increasing threat, according to the European Commission. 

Gross domestic product will increase by 1.3% next year and by 1.6% in 2026, the EU’s executive arm said in a report published Friday. That’s slightly stronger than what the International Monetary Fund predicted last month and notably higher than the 0.8% seen by officials for 2024.

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Consumer-price growth is seen moderating to 2.1% next year and to 1.9% in 2026, just below the European Central Bank’s 2% target. Despite some expected volatility in the short term, the disinflationary process “appears solidly in place,” the Brussels-based commission said. 

“As inflation continues to ease and private consumption and investment growth pick up, with unemployment at record lows, growth is set to gradually accelerate over the next two years,” EU Economy Commissioner Paolo Gentiloni said in a statement. “However, structural challenges and geopolitical uncertainty weigh on our future prospects.” 

The report doesn’t mention Donald Trump, who won the US presidential election several days after its cut-off date for incoming information. He presents a sizable risk to the European economy because of his pledge to raise tariffs on China and everyone else. 

Speaking to journalists in Brussels, Gentiloni said the trade relationship between the EU and the US is one of the world’s largest and most strategically significant, with a volume of €850 billion ($898 billion) last year for goods and another €650 billion for services. 

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“A possible protectionist turn in US trade policy would be extremely harmful to both economies,” he said. “The commission will work with the incoming US administration to advance a strong transatlantic agenda and ensure that international trade channels remain open, while making them more secure.”

Officials acknowledged that ongoing wars in Ukraine and the Middle East present another important risk as they fuel the “vulnerability of European energy security.” 

Bundesbank President Joachim Nagel already warned this week that Trump’s tariff plan could cost Germany 1% of output. That would aggravate the situation in Europe’s biggest economy, which has lagged the rest of the region because of persistent weakness in its manufacturing sector. 

The commission still predicts growth there of 0.7% next year after a slight contraction in 2024, as easing inflation and rising wages lead to a pickup in household consumption. 

While those factors had been expected to ignite a region-wide rebound earlier this year, Brussels officials noted that the “restraint to consumption appears to be loosening.”

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They expect households to lower their savings rate as interest rates fall, and corporate investment to rebound robustly due to strong balance sheets, recovering profits and improving credit conditions. 

Euro-area gross domestic product rose more than expected in the third quarter, though some of that has been credited to volatile Irish numbers and one-off effects from the summer Olympics in France. Growth has held up better outside of the currency bloc’s two biggest economies, with Spain expected to rack up expansion of 3% in 2024. 

Momentum there is seen slowing to 2.3% in 2025, while expansion in Italy is expected to pick up to 1% from 0.7%. 

Monetary policy will provide a tailwind as the ECB keeps cutting borrowing costs. Concerns about the region’s growth outlook already prompted officials to bring forward such a move last month, and economists widely expect further easing at future meetings. 

While policymakers in October expected to reach their inflation target earlier than previously foreseen, the commission still forecast a return to the 2% goal only in the fourth quarter of 2025. The ECB will present its own set of projections when officials next meet in December. 

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Brussels officials see the euro area’s collective budget deficit narrowing below the 3%-of-output ceiling next year, though France is a notable outlier. The gap there will only decline to 5.4% in 2026 from 6.2% this year, according to the commission. Italy’s deficit is projected to decline to 2.9% in 2026. 

“Member states will have to walk a narrow path of bringing down debt levels while supporting growth, aided by the new economic governance framework and the continued implementation” of the recovery fund put in place after the pandemic, Gentiloni said. 

—With assistance from Barbara Sladkowska.

(Updates with Gentiloni comment on US election in sixth paragraph.)

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