Bank of America from Investing.com

Investing.com – The economic outlook for Europe in 2025, as assessed by analysts at BofA Securities, highlights a complex mix of challenges and opportunities, reflecting a landscape characterized by fiscal policy shifts, trade uncertainties and inflation dynamics.

Key findings from their latest research suggest that a year is characterized by different developments across the euro area, the UK and individual Member States.

In the Eurozone, growth is expected to be around 0.9% in 2025, supported by a slight cyclical recovery driven by consumption.

This recovery benefits from the ongoing disinflation process, which supports real wage increases, although only until the second half of the year.

However, business investment is expected to remain subdued due to increased trade uncertainties and constrained medium-term demand.

The European Central Bank is expected to continue its interest rate cutting cycle, with the deposit rate potentially falling to 1.5% by September 2025, as the ECB grapples with weak economic momentum and persistent inflation below its targets.

Inflation in the euro area is expected to be 1.6% in 2025, reflecting the impact of lower energy prices and a subdued demand environment.

Analysts expect this to continue to manifest itself in a chronic output gap and an overly restrictive policy mix.

Despite these challenges, the possibility of a pan-European fiscal reform or rethink under German leadership could offer upside potential, although these remain uncertain given the region’s current political and economic climate.

The UK’s economic development reveals a slightly different narrative. Growth expectations for 2025 are 1.5%, supported by fiscal easing measures introduced in the October 2024 Budget.

However, inflation risks remain, with forecasts suggesting inflation will remain above target until mid-2026 due to wage growth and political pressures.

The Bank of England is expected to take a cautious approach to cutting interest rates, aiming for a final rate of 3.5% by early 2026.

Meanwhile, risks related to possible US-imposed tariffs and global trade uncertainties could further complicate the outlook and impact trade and consumer sentiment.

At a country-specific level within the Eurozone, Germany and France face particular challenges.

German growth forecasts were downgraded to 0.4% in 2025 due to ongoing fiscal rigidity and labor market pressures, while in France, political uncertainties surrounding the budget could exacerbate economic fragility.

Italy and Spain are showing relatively stronger performances, with Spain continuing to outperform other major economies in the region due to government spending and tourism, although long-term fiscal challenges remain.