Eurozone economic system unexpectedly flatlines in fourth quarter

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The Eurozone economic system unexpectedly stagnated within the fourth quarter, ratcheting up the stress on the European Central Financial institution to chop rates of interest extra aggressively this yr.

The zero progress within the quarter missed even the modest 0.1 per cent enlargement predicted by economists polled by Reuters and 0.4 per cent progress within the third quarter. For 2024, the Eurozone economic system expanded 0.7 per cent, in accordance with information launched by Eurostat on Thursday.

The figures come simply hours earlier than the ECB lower its benchmark rate of interest by a quarter-point to 2.75 per cent, the bottom degree since early 2023.

“The area’s financial prospects are worse than most assume,” stated Jack Allen-Reynolds at Capital Economics. “We count on this to immediate the ECB to chop rates of interest by extra this yr than is discounted out there.”

The stagnation underlines the problem going through the area as Germany, the Eurozone’s greatest economic system, struggles with a extreme manufacturing downturn and political turbulence.

German GDP contracted 0.2 per cent within the ultimate three months of 2024 in contrast with the earlier quarter, whereas France’s economic system unexpectedly shrank by 0.1 per cent. Output was flat in Italy.

Customers in massive elements of Europe have remained cautious even after inflation subsided following the surge in costs that pressured central banks all over the world to boost charges.

One exception is Spain, the place GDP rose 0.8 per cent within the fourth quarter in contrast with the earlier three-month interval, making it an outlier among the many greatest economies within the single forex area.

Merchants are betting that the ECB will make one other two or three quarter-point cuts this yr, in accordance with ranges implied by swaps markets.

The euro, which has weakened in latest months because the financial coverage paths of the US and Eurozone diverge, was little modified at $1.042 in late afternoon buying and selling.

Separate figures from Eurostat pointed to a slight weakening within the labour market, because the Euro space unemployment fee rose to six.3 per cent in December, up from 6.2 per cent in November.

“Weak point is throughout us whereas different main economies present progress,” stated Bert Colijn, an economist at ING.

The deteriorating image within the Eurozone contrasts with the US, which the IMF predicts will develop 2.7 per cent this yr, near its tempo in 2024. The US Federal Reserve left rates of interest unchanged on Wednesday, as Jay Powell, its chair, described the economic system as “robust general” whereas labour market circumstances stay “stable”.

US President Donald Trump sharply criticised the Fed’s determination to carry charges.

Economists warned that the opportunity of US tariffs being imposed on European merchandise might add to the forex bloc’s headwinds. The risk comes amid a interval of heightened political uncertainty as Germany prepares for elections on February 23.

A ten per cent US tariff on all imports from the Eurozone, coupled with greater uncertainty about future US-EU industrial relations, might trim Eurozone progress by 0.3-0.5 proportion factors inside a yr, stated Holger Schmieding, chief economist at Berenberg.

For the ECB, he stated, “this might be an argument to chop charges beneath 2.25 per cent, which we at present venture because the trough for the deposit fee”.

Further reporting by Ian Smith