1、We expect 2025 to be another chal l enging year for the Euro area economy.First,nUS President-el ect Trumps pl an to impose tariffs is l ikel y to weigh significantl yon growth,with much of the drag stemming from higher trade pol icyuncertainty.Second,the negative trade effects are l ikel y to be re

2、inforced bycontinued structural headwinds in the manufacturing sector,incl uding highenergy prices and competitive pressures from China.Third,we expect ongoingfiscal consol idation across the Euro area.That said,we see several reasons for continued growth,rather than a Euro areanrecession.Growth mom

3、entum remains modestl y positive;consumption is l ikel yto recover given rising real incomes and el evated savings;and we expect theSouth to show continued resil ience compared with the North.We therefore forecast Euro area growth of 0.2%in Q1 and Q2,0.1%in Q3 andn0.2%in Q4.This resul ts in area-wid

4、e growth of 0.8%for 2025,notabl y bel owthe 1.2%consensus.We l ook for the weakest growth in Germany(0.3%),fol l owed by I tal y(0.6%)and France(0.7%),with Spain again outperformingnotabl y(2%).Given our subdued growth outl ook,we expect the unempl oyment rate to risennext year,reaching 6.7%by earl

5、y 2026.We see wage growth sl owing to 3.2%by 2025Q4,as pay catch-up compl etes and the l abour market softens.Underl ying inflation has resumed its downward trend since the summer,and wel ook for headl ine and core inflation to return to 2%sustainabl y by end-2025,driven by a further cool ing in ser

6、vices inflation.Subdued growth and continued disinflation impl y rising pressures for the ECB tonl ower rates and we expect the Governing Council to cut the deposit rate to1.75%in Jul y.We bel ieve that 25bp cuts remain more l ikel y than 50bp steps butsee a l ow hurdl e for a step-up in the pace in

7、 Q1 if the growth and inflation datadisappoint notabl y.Our probabil ity-weighted rate path therefore remains bel owmarket pricing.Next year wil l al so bring a number of pol itical and fiscal risks.A change inngovernment in Germany raises the prospect of a fiscal expansion,but we woul dexpect the C

8、onservatives to support onl y l imited additional fiscal measures withnegl igibl e growth effects before 2026.France wil l attempt to cut the deficitsharpl y,but significant fiscal sl ippage l ooks l ikel y and renewed l egisl ativeSven Jari St ehn+44(20)7774-8061|j Gol dman Sachs I nternational Fi

9、l i ppo Taddei +44(20)7774-5458|fil Gol dman Sachs I nternationalAl exandre St ot t +33(1)4212-1108|al Gol dman Sachs Bank Europe SE-ParisBranch James Moberl y+44(20)7774-9444|j ames.r.moberl Gol dman Sachs I nternationalKat ya Vashki nskaya+44(20)7774-4833| Gol dman Sachs I nternationalEuropean Eco

10、nomi cs Analyst Euro Area Outlook 2025:Under Pressure14 November 2024|6:31PM GMTI nvestors shoul d consider this report as onl y a singl e factor in making their investment decision.For Reg AC certification and other important discl osures,see the Discl osure Appendix,or go to following is a redacte

11、d version of the original report published November 14,2024 18 pgs.el ections are possibl e after Jul y 2025.I tal ys government is l ikel y to stick to its ambitious fiscal targets,providing a constructive backdrop for BTPs.Al though Spain wil l l ikel y produce a l arger deficit than pl anned beca

12、use of the flooding in Val encia,its debt ratio remains on a downward path.The structural outl ook for the Euro area economy remains chal l enging.We currentl ynsee Euro area potential growth at 1%but expect trend growth to sl ow to 0.8%by2030.Whil e Mario Draghis report identified areas of pol icy

13、action to raise growth inEurope,we see significant hurdl es for impl ementation,especial l y around additionalj oint EU funding.However,we see scope for additional EU defence spending andsome regul atory harmonisation from next year.14 November 2024 2Gol dman SachsEuropean Economi cs Anal ystEuro Ar

14、ea Out l ook 2025:Under Pressure We expect 2025 to be another chal l enging year for the Euro area economy.First,US President-el ect Trumps pl an to impose tariffs is l ikel y to weigh significantl y on Euro area growth.Whil e the size of any US tariffs is highl y uncertain,our anal ysis suggests th

15、at much of the growth drag wil l come from higher trade pol icy uncertainty,rather than the actual tariff increases themsel ves(Exhibit 1).Trade pol icy uncertainty measures have al ready been on the rise.Our basel ine is that Trump imposes targeted tariffs on Europe,focusing on autos-rel ated expor

16、ts.We estimate that el evated trade tensions wil l l ower the l evel of area-wide real GDP by 0.5%,incl uding effects on real incomes,trade real l ocation and pol icy offset(Exhibit 2,l eft).We expect the growth hit to concentrate over one year,starting in 2025Q1 with a peak growth drag in Q3.The cu

17、mul ative hit is l ikel y to be l argest in Germany(0.6%)and smal l est in Spain and I tal y(0.3%),given differences in trade openness and manufacturing intensity(Exhibit 2,right).Our anal ysis suggests that the GDP hits wil l be twice as l arge in a downside scenario where Trump imposes a 10%across

18、-the-board tariff on the EU.Exhi bi t 1:Hi gher Trade Poli cy Uncertai nty to Wei gh on Growth In the lef t chart,f ull i mplementati on assumes a 10%tari f f on all US i mports(i ncludi ng f rom Europe)and baseli ne assumes a more li mi ted set of tari f f s on Europe,i ncludi ng on autos-related i

19、 mports,and tari f f s on Chi na.In the ri ght chart,we plot the European TPU Index as of the 13th of November 2024.Source:Goldman Sachs Global Investment Research,Haver Analyti cs,Bloomberg14 November 2024 3Gol dman SachsEuropean Economi cs Anal ystSecond,we expect the negative trade effects to be

20、reinforced by continued structural headwinds in the manufacturing sector.Energy prices have fal l en markedl y from their peak,but European gas prices remain notabl y above pre-2022 l evel s and material l y higher than in the US(Exhibit 3,l eft).Meanwhil e,China has emerged as a key competitor to E

21、uropean goods production,material l y gaining market share in industries that have seen cost increases(Exhibit 3,right).As a resul t,we see a continued structural headwind to the industrial recovery next year,particul arl y in Germany.Third,we expect ongoing fiscal consol idation in 2025 with an are

22、a-wide growth drag of 0.5pp(Exhibit 4).I n Germany,the constitutional debt brake wil l continue to constrain fiscal space;France pl ans to embark on a maj or fiscal adj ustment;I tal y has promised a faster fiscal consol idation than previousl y expected;and whil e Spain is l ikel y to del iver a Ex

23、hi bi t 2:We Expect a 0.5%GDP Hi t f rom Trade Tensi ons Source:Goldman Sachs Global Investment Research,Haver Analyti csExhi bi t 3:Structural Headwi nds f rom Energy Pri ces and Chi na Competi ti on The si ze of the bubbles i n the ri ght chart represents the German export share out of total Germa

24、n exports f or each sector.The growth di f f erenti als are calculated as the di f f erence between Chi nese and German sectoral exports and PPI yoy percentage growth as of July 2024.Source:Goldman Sachs Global Investment Research,Haver Analyti cs14 November 2024 4Gol dman SachsEuropean Economi cs A

25、nal ystl arger-than-expected deficit due to the flooding in Val encia,it remains on track to del iver a steady adj ustment based on the 2024 three-year pl an.Fiscal support through the European Recovery Fund remains positive in 2025,but the boost is not enough to overturn the contractionary stance o

26、f national fiscal pol icies.That said,we see several reasons for continued growth,rather than a Euro area recession.First,area-wide growth momentum is modest but positive(Exhibit 5).The survey data remain weak,with the PMI s at sl ightl y contractionary l evel s,our CAI around zero and a l oss of mo

27、mentum in the forward-l ooking surveys.But the recent data have surprised to the upside and the hard data l ook more constructive,with a surprisingl y firm 0.4%gain in Q3 real GDP.Considering the l ikel y payback from the Ol ympics in France,we are tracking Q4 GDP at 0.2%,with the annual ised underl

28、 ying trend around 1%.Exhi bi t 4:Ongoi ng Fi scal Consoli dati on Source:Goldman Sachs Global Investment Research,Haver Analyti csExhi bi t 5:Modest But Posi ti ve Growth Momentum Source:Goldman Sachs Global Investment Research,Haver Analyti cs14 November 2024 5Gol dman SachsEuropean Economi cs Ana

29、l ystSecond,we expect consumption to recover given rising real incomes and el evated savings(Exhibit 6).Lower headl ine inflation and ongoing firm nominal wage growth suggest that real disposabl e income wil l grow by around 1%on a Q4/Q4 basis in 2025.Whil e the increase in the househol d saving rat

30、e in H1 is difficul t to expl ain,we stil l expect the saving rate to fal l gradual l y next year as deposit rates fal l and savings behaviour normal ises.As a resul t,we l ook for significant gains in consumption,up 1.6%on a Q4/Q4 basis in 2025.Third,we see continued growth resil ience in the South

31、(Exhibit 7).The economic outperformance of Spain,Portugal and Greece has been striking this year,driven by firm services growth(responsibl e for a greater share of overal l activity than in the North),el evated immigration(underpinning strong empl oyment growth)and investment support from the Recove

32、ry Fund.We l ook for growth moderation across the South next year,but we see greater resil ience to trade tensions and competitive pressures from China than in the North.Exhi bi t 6:A Gradual Recovery i n Consumpti on Source:Goldman Sachs Global Investment Research,Haver Analyti cs14 November 2024 6

33、Gol dman SachsEuropean Economi cs Anal ystTaken together,we therefore l ook for weak but positive Euro area growth in 2025(Exhibit 8).At the Euro area l evel,we forecast 0.2%in Q1 and Q2,0.1%in Q3 and 0.2%in Q4.This resul ts in annual average growth of 0.8%for 2025,notabl y bel ow the 1.2%consensus.

34、We l ook for some improvement in growth in 2026 as the effect of the trade tensions fade with 1%growth,but our forecast remains sharpl y bel ow the 1.4%consensus.Looking across countries,our forecast is weakest for Germany(0.3%for 2025,notabl y bel ow consensus)and strongest for Spain(2%next year,cl

35、 ose to consensus).We see two main risks to our forecast.On the positive side,a faster normal isation in the househol d saving rate coul d drive stronger consumption growth than expected.On the negative side,President-el ect Trumps pol icy agenda coul d weigh more sharpl y on the Euro area economy,v

36、ia bl anket tariffs on Europe and negative sentiment effects around the war in Ukraine.We see a 30%probabil ity that the Euro area enters a Exhi bi t 7:Southern Resi li ence Source:Goldman Sachs Global Investment Research,Haver Analyti cs,European Commi ssi onExhi bi t 8:Subdued Growth Ahead Source:

37、Goldman Sachs Global Investment Research,Haver Analyti cs,Bloomberg14 November 2024 7Gol dman SachsEuropean Economi cs Anal ystsignificant recessionwith material l abour market deteriorationover the next year.Di si nflati on on Track Al though l abour markets have remained resil ient despite subdued

38、 GDP gainswith area-wide unempl oyment at an al l-time l ow of 6.3%measures of empl oyment growth are sl owing steadil y(Exhibit 9).Fol l owing a gain of 0.2%in Q3,our nowcast model tracks area-wide empl oyment growth at 0.2%in Q4 and 0.1%in Q1,driven by weaker empl oyment surveys.Given our subdued

39、growth outl ook,we expect the unempl oyment rate to drift up through next year,reaching 6.7%by earl y 2026.A softening l abour market supports our view of cool ing wage growth(Exhibit 10).Fol l owing notabl e upside surprises earl y in the year,pay pressures have now cool ed meaningful l y,with our

40、area-wide wage tracker running at 4.4%in Q3.Our anal ysis suggests that much of the remaining strength in wage growth reflects catch-up effects,which are l ikel y to fade in coming months as the l evel of real wages real igns with productivity.Consistent with this,the forward-l ooking pay indicators

41、 point to sl owing ahead,incl uding wage surveys(such as the I ndeed wage tracker)and national wage data in countries with short durations of pay agreements(such as France).We therefore expect wage growth to sl ow to 3.2%by 2025Q4,faster than foreseen in the ECBs staff proj ections.Exhi bi t 9:Stead

42、y Labour Market Sof teni ng Source:Haver Analyti cs,Goldman Sachs Global Investment Research14 November 2024 8Gol dman SachsEuropean Economi cs Anal ystFol l owing sticky services inflation in H1,core inflation has resumed its downward trend since the summer(Exhibit 11).Our summary measure of underl

43、 ying inflationwhich combined al ternative trend inflation indicatorsnow stands at 2.6%yoy,with the sequential monthl y momentum down to 0.20%(from 0.24%in the middl e of the year).Given residual seasonal ity,we expect further sl owing during the rest of the year,with annual core inflation reaching

44、2.5%in December.We then see headl ine and core inflation returning to 2%sustainabl y next year,driven by subdued gains in goods prices and a further cool ing in services inflation.I n particul ar,we l ook for a further unwind in inflation of key backward-l ooking components,incl uding indexation for

45、 rents and catch-up to costs for insurance.Moreover,we expect cycl ical categoriesincl uding restaurantsto show further disinflation,as l abour markets soften,wage growth sl ows and demand remains subdued.We expect modest upward inflation pressure from trade tensions with the US,with the EU retal ia

46、ting against a Exhi bi t 10:Wage Growth to Return to 3%i n 2025 Source:Haver Analyti cs,Goldman Sachs Global Investment ResearchExhi bi t 11:Di si nflati on i s on Track Source:Haver Analyti cs,Goldman Sachs Global Investment Research14 November 2024 9Gol dman SachsEuropean Economi cs Anal ystl imit

47、ed number of US tariffs(Exhibit 12,l eft).Taken together,we forecast year-over-year core inflation at 2.2%in Q2 and 2%in Q4 next year,consistent with inflation expectations around target(Exhibit 12,right).The outl ook for inflation,however,remains notabl y uncertain.On the upside,price resets in Q1

48、and further Euro depreciation coul d impl y stickier-than-expected inflation pressures.On the downside,more pronounced l abour market weakening coul d sl ow services inflation more than expected and US tariffs on China coul d incentivise China to sel l excess goods at reduced prices into Europe.More

49、 Pressure f or ECB to Cut Given subdued growth and continued disinflation,we see rising pressures for the ECB to l ower pol icy rates next year(Exhibit 13).Our forecasts are now notabl y bel ow the September staff proj ections on growth(0.8%vs 1.3%for 2025)and inflation(2%vs 2.2%),pointing to a sign

50、ificant downgrade at the December meeting and continued sequential rate cuts into next year.Existing studies point to a real equil ibrium rate(or r*)in the 0-0.5%range,impl ying a 2-2.5%nominal neutral pol icy rate.Given our forecast for weaker growth and inflation,we expect the Governing Council to

51、 take rates sl ightl y bel ow neutral with 25bp cuts at every meeting to 1.75%in Jul y.Exhi bi t 12:We Do Not Expect a Sustai ned Inflati on Undershoot Source:Haver Analyti cs,Goldman Sachs Global Investment Research14 November 2024 10Gol dman SachsEuropean Economi cs Anal ystWhil e a return to quar

52、terl y cuts is possibl e if the economy turns out to be more resil ient than expected,we see risks skewed towards faster and deeper cuts(Exhibit 14).Given better-than-expected activity data in recent weeks and desire to see detail s behind President-el ect Trumps pol icy agenda,we bel ieve that a 25

53、bp cut remains notabl y more l ikel y than a 50bp step in December.That said,we see a l ow hurdl e for a step-up in the pace in Q1 if the growth and inflation data disappoint markedl y.Turning to our styl ised scenarios,we pl ace a 50%probabil ity on our basel ine of sequential cuts to 1.75%,20%on a

54、 return to quarterl y cuts to a higher terminal rate and 30%on a deeper cutting cycl e.We therefore continue to see downside risk to our modal terminal rate forecast,with our probabil ity-weighted path bel ow market pricing.Poli ti cal and Fi scal Ri sks Next year wil l bring a number of pol itical

55、and pol icy risks.Exhi bi t 13:Pressures f or Conti nued Sequenti al Cuts Source:Haver Analyti cs,Goldman Sachs Global Investment ResearchExhi bi t 14:Ri sks Skewed Towards Faster and Deeper Cuts Source:Haver Analyti cs,Goldman Sachs Global Investment Research,Bloomberg14 November 2024 11Gol dman Sa

56、chsEuropean Economi cs Anal ystFirst,Germany wil l face earl y el ections next year,with the vote l ikel y to be hel d on February 23rd.Current pol l s show the conservative CDU/CSU in the l ead,suggesting that a“grand coal ition”(with the social democrats,SPD)is most l ikel y,fol l owed by a“bl ack

57、-green”coal ition(with the Greens).An agreement on the 2025 budget now seems unl ikel y,which coul d entail a sl ight fiscal contraction in 2025H1,but the new government coul d then pass a suppl ementary budget to provide an offsetting boost in H2.Whil e a change in government raises the prospect of

58、 more expansionary fiscal pol icy given Germanys fiscal space,we woul d expect the Conservatives to support onl y l imited additional fiscal measures.A pl ausibl e scenario coul d entail additional investment worth 0.5%of GDP per year via reform of the debt brake,which coul d support growth modestl

59、y from 2026(Exhibit 15,right).A more substantial upside scenariovia activation of the debt brake escape cl ause and/or additional off-bal ance-sheet fundsmight provide fiscal support worth 1%of GDP.Second,France aims to cut the publ ic deficit to 5%of GDP in 2025(from 6.1%this year).The magnitude of

60、 the proposed consol idation and the rel iance on tax increases gives us l ittl e confidence that the deficit target wil l be met,and we now l ook for a deficit of 5.4%next year.As a resul t,we expect the debt-to-GDP ratio to rise to 118%by 2027.Whil e the fiscal and economic outl ook is becoming mo

61、re chal l enging,we see scope for some pol itical stabil ity in the near term,and our base case remains for PM Barniers government to pass the budget bil l before year-end.We continue to see significant uncertainty thereafter,however,with new l egisl ative el ections becoming possibl e after Jul y 2

62、025.Exhi bi t 15:Li mi ted Scope f or More Fi scal Support i n Germany Source:Haver Analyti cs,Goldman Sachs Global Investment Research,Forsa14 November 2024 12Gol dman SachsEuropean Economi cs Anal ystThird,the I tal ian government has l owered its deficit targets for the coming years,setting debt-

63、to-GDP on a decreasing path from 2027.The governments pl ans woul d take I tal y out of the Excessive Deficit Procedure(EDP)in 2026 and remain compl iant with European fiscal rul es afterwards.Rising real sovereign borrowing rates and sl ow growth,however,wil l make it chal l enging for I tal y to r

64、emain compl iant with fiscal rul es in the medium term.Our forecast is that fiscal consol idation wil l be sl ightl y sl ower than in the government pl an from 2026 and debt-to-GDP wil l start to decrease,but a bit more sl owl y and onl y from 2027 given cool ing nominal growth.Nonethel ess,we expec

65、t the government to stick to its targets,providing a constructive environment for BTP val uation in the coming quarters.Li ttle Progress on Structural EU-Wi de Issues The structural outl ook for the Euro area economy remains chal l enging.I n addition to Exhi bi t 16:Fi scal Sli ppage i n France Sou

66、rce:Haver Analyti cs,Goldman Sachs Global Investment Research,Di recti on gnrale du TrsorExhi bi t 17:Ambi ti ous Fi scal Targets i n Italy Source:Haver Analyti cs,Goldman Sachs Global Investment Research,Di parti mento del Tesoro14 November 2024 13Gol dman SachsEuropean Economi cs Anal ysthigh ener

67、gy costs,trade tensions and China competition discussed above,Europe has seen disappointing productivity growth and faces material headwinds from its ageing popul ation.As a resul t,we currentl y estimate Euro area potential growth at 1%down from 1.2%historical l yand expect trend growth to sl ow to

68、 0.8%by 2030(Exhibit 18).Looking across countries,we estimate current potential growth to be 0.8%in Germany,1%in France,0.8%in I tal y and 1.7%in Spain,but expect al l countries to experience further structural sl owing by 2030.Mario Draghis competitiveness report identified areas of pol icy action

69、to raise growth in Europe.First,sl uggish productivity has to be tackl ed in the sectors where it has been l agging behind and,therefore,it needs to be addressed with industrial pol icies at the sector l evel,in addition to general reforms.Green technol ogy and defence offer primary exampl es.Second

70、,raising productivity growth requires l arge-scal e investment,which the report estimates at EUR 750-800bn annual l y,about 4.5%of EU GDP.Exhi bi t 18:We See Potenti al Growth Slowi ng to 0.8%i n 2030 Source:Haver Analyti cs,Goldman Sachs Global Investment ResearchExhi bi t 19:The European Competi t

71、i veness Gap Source:Haver Analyti cs,Goldman Sachs Global Investment Research14 November 2024 14Gol dman SachsEuropean Economi cs Anal ystWhil e additional pol icy support for investment woul d be key to underpinning the European economic recovery,we see significant hurdl es for impl ementing Draghi

72、s recommendations.I t is unl ikel y,in our view,that the EU wil l be abl e to scal e up j oint EU funding.However,we bel ieve that additional EU defence spending is l ikel y and some regul atory harmonisation coul d take pl ace starting from next year.European Economi cs Team14 November 2024 15Gol d

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