Weak growth, more ECB rate cuts

Euro area: Less growth in the winter half, …

The Purchasing Managers' Index, an important leading economic indicator for the eurozone, is close to the recession threshold for the second month in a row (title chart). We take this seriously and are lowering our forecast for GDP growth for the winter half-year. For the quarters thereafter we still expect a moderate economic recovery with growth rates slightly above trend growth, because the pain of past ECB interest rate hikes is fading and two-thirds of the increase in energy prices from 2022/23 has now been reversed.

Due to the weaker starting point, we are lowering our 2025 growth forecast for the euro area from 1.1% to 0.9%. For Germany, which is suffering from competitive problems, we now expect growth of just 0.2% in 2025 (previously: 0.5%), which means we remain significantly more cautious than the average of the economists.

… which, together with falling energy prices, pushes down inflation, …

The low economic growth in the winter half-year is likely to exert some pressure on the underlying price pressure, i.e. the rise in consumer prices excluding energy and food (core inflation). However, the significant decline in energy prices, which is likely to feed through to core inflation via transport services, is more important. The core measure of consumer prices should rise temporarily at annualized rates consistent with the ECB's 2% target during the winter half-year.

A similar situation was observed in the fall of last year. However, this effect petered out after the turn of the year 2023/24 and the strong rise in wages again dominated core inflation, causing it to rise at rates well above the ECB target in annualized terms. We expect a similar situation from spring next year onwards – especially since the increase in collectively agreed wages has now settled at a high 4.5%, with no sign of a slowdown yet.

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