Eurozone - Consumer awakens as Trump enters the stage

2025 has started with two important political events which impact the eurozone growth outlook. Shortly after Trump is inaugurated and takes office, new details are expected on possible tariffs. As outlined in our Global Outlook (see here), the impact of tariffs on the eurozone is sizeable, particularly affecting exporting economies like the Netherlands and Germany. Until there is clarity, tariffs hang over the outlook. Another important event is the German elections (see our spotlight for a preview) in February. The elections take place against the backdrop of a very weak German economy, with no turnaround in sight for struggling industry in the near term. Alongside a slight weakening in the labor market, and the currently still-absent frontloading boost from trade (expected by companies to avoid tariffs), we have downgraded our German growth forecast from 0.8% to 0.5% for 2025. We maintain our eurozone aggregate growth forecast of 1.2% for 2025. This is due, in part, to less fiscal tightening in France, which is expected to offset some of the German growth weakness. Additionally, peripheral countries continue to outperform. Most importantly, the outlook for consumer spending bodes well for consumption growth in 2025.

Indeed, with purchasing power increases due to wage growth outpacing inflation and healthy household balance sheets, increased household spending is expected to be the main driver of growth in 2025, alongside smaller contributions from investment and government consumption. A promising start to this was Q4 2024 hard consumption data coming in firmer than expected. Retail sales have been growing roughly at a 5% annualized rate in recent months, finally outpacing growth in the services sector for the first time since 2021, which also continues to grow at a solid 2% rate. Goods consumption is finally seeing the anticipated rebound after slumping for most of 2024. Rate cuts by the ECB are likely a major factor, as the pickup in mortgage lending (new home loans ex-refinancing) — a strong indicator for (goods) consumption — is currently growing at around 20% y/y (see our September Monthly for more on this topic).

Inflation rebounded from 2.2% in November to 2.4% in December, largely due to energy. Three reasons led to the uptick in energy inflation: 1) base effects, 2) a weak euro leading to higher petrol prices and 3) lower gas inventories due to cold weather increased gas and electricity prices. In other areas, inflation dynamics were broadly unchanged. The main upward pressure on inflation continues to come from services inflation, and with wage growth still elevated (albeit slowing), that will remain the case in the near term. Big picture, we expect headline inflation to resume its fall already from February as energy base effects fade, with the 2% target expected to be reached sustainably by April. Core inflation is expected to stay more elevated in the near-term due to services, with a more sustained fall expected around the middle of 2025. With the recent rebound in inflation fully anticipated by the ECB, and the Governing Council clear on their intention to return policy rates to neutral levels, another 25bp rate cut at the January meeting remains our base case. Looking ahead to the rest of 2025, we see substantial room for further rate cuts. First, we believe the neutral rate in the eurozone is lower than the ECB's estimates suggest. Second, our US tariff scenario is likely to lead to a disinflationary shock for the eurozone. Ultimately, we anticipate the ECB will reduce its deposit rate to as low as 1%.