Europe's Economic Woes: Germany and France Contract, ECB Cuts Rates

Key Points:

* Germany's GDP declined by 0.2%, while France's dropped by 0.1% in Q4 2024.
* Italy and Austria saw economic stagnation.
* Bonds rallied, pushing Germany's 10-year yield down.
* The euro fell to its lowest level of the day against the dollar.
* Investors expect the ECB to cut interest rates by 94 basis points this year.
* Germany's manufacturing weakness and potential US trade measures weigh on the region.
* Spain remains a bright spot with a 0.6% GDP growth in Q4 2024.

Economic Contraction in Europe's Top Economies

Germany and France, Europe's two largest economies, experienced economic contractions in the final quarter of 2024. Germany's GDP fell by 0.2%, marking the second consecutive year of decline. France's economy contracted by 0.1%, disappointing analysts who had forecast stagnation.

ECB Interest Rate Cuts

The European Central Bank (ECB) is expected to cut its deposit rate by another quarter-point to 2.75% today. The ECB is aiming to stimulate economic growth amid concerns over slowing momentum. However, inflation remains a concern, as Spanish consumer prices rose by 2.9% in January 2025.

Political Uncertainty in Germany

Germany's disappointing economic data comes ahead of a snap election on February 23, which could see Chancellor Olaf Scholz replaced by Friedrich Merz. Merz has pledged lower taxes and less regulation, but analysts remain skeptical about the potential impact on economic growth.

Challenges Facing Businesses

Companies are facing challenges in Europe. Tire and component maker Continental AG reported struggles in increasing sales due to a "challenging market environment."

Fiscal Crisis in France

France is facing a budget crisis, with last year's fiscal shortfall reaching 6% of output. The government is struggling to pass a 2025 budget and is facing criticism from businesses.

Strong Growth in Spain

Despite the economic challenges faced by many European countries, Spain reported a 0.6% GDP growth in Q4 2024. Portugal and Lithuania also recorded strong growth.