Eurozone Stalls in Q4 as Confidence Wanes

The eurozone economy unexpectedly stagnated in the final quarter of 2024, according to Eurostat. Gross domestic product (GDP) remained unchanged from the previous three months, defying analyst expectations of 0.1% growth.

Contributing Factors

The stagnation was primarily driven by economic contractions in Germany and France. Germany's GDP fell 0.2%, while France's decreased by 0.1%. These declines reflect a lack of growth drivers, as well as the impact of global uncertainties and punitive trade measures.

Italy and Austria also reported flatline GDP.

ECB Intervention Expected

The European Central Bank (ECB) is expected to respond to the economic slowdown by cutting its deposit rate by a quarter-point to 2.75% later today. However, policymakers are also monitoring inflation, with consumer prices in Spain rising 2.9% this month.

Market Reaction

Investors expect further ECB rate cuts, with bets rising to 94 basis points of easing by year-end, up from 89 basis points on Wednesday. This implies three quarter-point reductions and an almost 80% chance of a fourth.

Political Uncertainty

The uncertainty surrounding US President Donald Trump's trade policy is also weighing on business sentiment in Europe. Meanwhile, Germany faces a snap election on February 23, which could potentially result in a change in government.

Corporate Challenges

Companies are facing difficulties due to the weak economic environment. Tire and component maker Continental AG has announced it will struggle to increase sales in 2025. Germany has seen its GDP shrink for two consecutive years, and its government has revised down its 2025 growth outlook to 0.3%.

France's Budget Crisis

France is grappling with a budget crisis, forcing the government to rely on temporary legislation to avoid a shutdown. Economic fragility has exacerbated the situation, leading to a fiscal shortfall of around 6% of output in 2024. Talks on a full 2025 budget will culminate next week, with Prime Minister Francois Bayrou's proposed tax-and-spend plans facing a critical vote.

Spain's Standout Performance

Among European economies, Spain reported a 0.8% jump in GDP and remains the region's strongest performer. Portugal and Lithuania also recorded robust growth.