EconomyEurozone economy unexpectedly stagnates in fourth quarter

Eurozone economy unexpectedly stagnates in fourth quarter


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The Eurozone economy unexpectedly stagnated in the fourth quarter, ratcheting up the pressure on the European Central Bank to cut interest rates more aggressively this year.

The zero growth in the quarter missed even the modest 0.1 per cent expansion predicted by economists polled by Reuters and 0.4 per cent growth in the third quarter.

For 2024, the Eurozone economy expanded 0.7 per cent, according to data released by Eurostat on Thursday.

The figures come just hours before the ECB is expected to cut its benchmark interest rate by a quarter-point to 2.75 per cent, the lowest level since early 2023.

“The region’s economic prospects are worse than most think,” said Jack Allen-Reynolds at Capital Economics. “We expect this to prompt the ECB to cut interest rates by more this year than is discounted in the market.”

The stagnation underlines the challenge facing the region as Germany, the Eurozone’s biggest economy, struggles with a severe manufacturing downturn and political turbulence.

German GDP contracted 0.2 per cent in the final three months of 2024 compared with the previous quarter, while France’s economy unexpectedly shrank by 0.1 per cent. Output was flat in Italy.

Consumers in large parts of Europe have remained cautious even after inflation subsided following the surge in prices that forced central banks around the world to raise rates.

One exception is Spain, where GDP rose 0.8 per cent in the fourth quarter compared with the previous three-month period, making it an outlier among the biggest economies in the single currency region.

Following the data, traders increased bets that the ECB will cut rates four times this year, according to the swaps market.

The euro, which has weakened in recent months as the monetary policy paths of the US and Eurozone diverge, was little changed at $1.041.

Separate figures from Eurostat pointed to a slight weakening in the labour market, as the Euro area unemployment rate rose to 6.3 per cent in December, up from 6.2 per cent in November.

“Weakness is all around us while other major economies show growth,” said Bert Colijn, an economist at ING.

The deteriorating picture in the Eurozone contrasts with the US, which the IMF predicts will grow 2.7 per cent this year, close to its pace in 2024. The US Federal Reserve left interest rates unchanged on Wednesday, as Jay Powell, its chair, described the economy as “strong overall” while labour market conditions remain “solid”.

US President Donald Trump sharply criticised the Fed’s decision to hold rates.

Economists warned that the possibility of US tariffs being imposed on European products could add to the currency bloc’s headwinds. The threat comes amid a period of heightened political uncertainty as Germany prepares for elections on February 23.

A 10 per cent US tariff on all imports from the Eurozone, coupled with higher uncertainty about future US-EU commercial relations, could trim Eurozone growth by 0.3-0.5 percentage points within a year, said Holger Schmieding, chief economist at Berenberg.

For the ECB, he said, “this would be an argument to cut rates below the 2.25 per cent, which we currently project as the trough for the deposit rate”.

Additional reporting by Ian Smith



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