Will there be an economic recession in Europe in 2025?
6 FEB, 2025
Europe ended 2024 at a crossroads from which, apparently, it cannot escape. Despite forecasts of moderate growth for the eurozone, significant concerns persist: the weakness of key economies such as Germany and France, coupled with geopolitical challenges and tensions with the United States, pose considerable risks. In addition, the decisions of the European Central Bank on interest rates and global trade tensions add complexity to the economic scenario. In the following article, four experts analyze the economic indicators, monetary and fiscal policies, and external factors that could determine whether Europe will manage to avoid a recession in 2025 or if it will face a period of economic contraction.
- François Rimeu, Senior Strategist at Crédit Mutuel Asset Management
The growth prospects for the eurozone are weak and declining but we will probably avoid a recession for the following reasons.
Firstly, consumer confidence is gradually improving in all Eurozone countries except, perhaps, in France due to the current political instability. The dynamic is still fragile, but it has been in place for 24 months. The volume of consumption, logically, follows the same trend and, since it represents about half of the Eurozone's GDP, this should have a direct effect on growth. The volume of consumption has grown at a rate of 1.2% in the last 12 months, a weak but positive figure.
This trend should continue as long as real wages continue to remain positive, something we expect to continue throughout 2025. Moreover, while Germany and France are struggling, the countries of southern Europe are in a much better position, with strong growth in Spain and Portugal. The Bank of Spain and the Bank of Portugal have indeed revised upwards their growth prospects for 2025, respectively to 2.5% and 2.2%. Also, the weakening of the euro against the dollar seen in the last four months will help the positive momentum of the eurozone's exports even if the decrease of the euro towards other currencies is more limited than against the dollar.
Finally, if following the elections of February 23 in Germany a majority in favor of a relaxation of the "debt brake" emerged, the country could increase the budget deficit, a scenario we now consider likely. If in the coming months France manages to regain some stability and if the turbulence associated with the Trump administration is not too strong, we could even hope for upward revisions of growth prospects in the eurozone for the second half of the year.
- Simone Benini, Portfolio Manager, AcomeA SGR
The performance of European stock markets since the beginning of the year does not seem to presage a recession scenario for the just started year. In fact, one of the only points of discontinuity between the last months of 2024 and the beginning of 2025 is the overperformance of European indices compared to overseas indicators. Despite growth prospects remaining more favorable for the USA than for the European Union, the latter sees a faster inflation containment process and the ECB expects a return to the 2% target during the year. The more favorable credit conditions expected for the coming months, the effect of the now advanced cycle of interest rate cuts, are a positive element in support of household and business consumption and investment, which can support expected growth for the next quarters. However, there are some risks for the Eurozone: the most recent data on consumer confidence remain in negative territory, and these maintain a strong propensity to save rather than consume; also the PMI data related to manufacturing are still in the contraction area. To the challenges related to growth and economic stagnation, are added the French and German political uncertainties (as well as industrial for the latter) that have characterized the European climate since last year. In addition, threats of tariff tightening by the Trump administration are a potential risk to face. However, if Trump's threats turn out to be less severe than expected, or merely negotiation maneuvers in US-Europe relations, we believe that European equity can continue to benefit from a cath-up in performance. Also, the resolution of political uncertainties in individual States and the normalization of some negative trends that have characterized the industrial sector, like the destocking that seems to be at the end, could avert any recessions that could hit the continent.
This dichotomy between Europe and the United States has been widely reflected in the market trends of recent years: investor positioning on the European area is at its lowest since 2020, while the weight of the American component in global indices is at historic highs. In this scenario, the valuations of European securities are extremely compressed and are beginning to be attractive: the overperformance in January may not only be a seasonal effect, but may begin to signal a trend reversal.
- Kaspar Hense, BlueBay Senior Portfolio Manager, Investment Grade, RBC BlueBay
Theoretically, the internal situation in Europe is improving. The ECB has been able to reduce interest rates from 4% to 3%, while commodity prices and overall inflation have decreased significantly. As a result, it is very likely that the European Central Bank will be able to quickly bring rates back to 2%, which means that real rates could return to negative territory. The euro has weakened significantly due to the “Trump rally” and this will give a certain boost to export-focused companies, despite the looming trade war on the horizon.
In the meantime, savings are high and mostly untouched. This contrasts with the United States where, especially for low-income families, all surpluses have been spent and credit risk is on the rise. Growth was substantially stronger in 2024 compared to 2023 and refinancing rates for companies have fallen with tighter spreads and lower rates. Italy, for example, is in a strong position, with public debt well absorbed by citizens and high savings; moreover, being a less automotive-focused exporting country, it should grow above potential growth rates.
Having said that, there are some reasons for concern. In particular, the low growth due to demographic dynamics, uncertainty about national policies and commitment at the European level. Germany is at the center of this situation and must face the threats of Russia, China and the United States, while having to deal with energy supply restrictions, export dumping and threats of trade war. Although the country has gone through a technical recession, it has not been accompanied by higher unemployment rates and higher fiscal deficits.
The economic pressures, however, have not changed. China still needs to export deflationary pressures to cope with its real estate bubble and the ongoing war in Ukraine continues to put pressure on oil and gas prices, with the potential to cause a structural shift upwards in the unemployment rate and to create the need for more fiscal automation.
At the moment we expect growth to be rather sideways compared to last year and we believe that more needs to be done on the fiscal front both for Germany and for the EU, which continue to be tested by the non-existence of a capital markets union and by populist and nationalist pressures.
Any progress on the fiscal policy front and further integration of the EU will also depend on the consequences of the German elections. Certainly, the biggest impact would be the green light from the Christian Democrats for EU-funded military spending, which could stimulate German growth and increase the sustainability of the debt of other countries like France.
- Philip Wolstencroft, European and Global equity fund manager, Artemis Investment Management
In our opinion focussing on whether Europe has a recession in 2025 is the wrong question for investors to be asking.
A recession is largely based on sets of macro-economic data which are often revised several months later, and this data does not reflect the fortunes of individual companies within Europe.
There will be heightened fears with the announcement by President Trump of the latest set of tariffs against countries based in the European Union.
History tells us that while the headlines might be painful the implication of their imposition takes some time to be clear and they seem to be directed in particular at a few high-profile industries, which are often cyclical in nature. They key question is value or growth companies.
Value stocks in general have faster growth than the market plus they often produce dividends creating a better overall total return for investors.
European value stocks are still abnormally cheap when measured against their own history and relative to their peers in other parts of the world such as the US and Asia.
European Investors are still skewed towards growth and away from value, and it is growth stocks which are more susceptible to recessions or negative macro data than value companies.
Historically, the relative fundamentals of value stocks have been good and going up, but they had a bad period from 2008-2022. For most people in financial markets this 14-year period since 2007 seems like a lifetime and so they start to anticipate further bad news. But the fundamentals, for the sharp-eyed amongst you, it might seem that if the gap is wide and the gold line is going up then value stocks are destined for a great decade.
In 2024 value stocks in the Europe ex-UK space outperformed the market by about 2%. Interestingly if you took about the performance of Nvidia in 2023 and 2024 then the S&P 500 has performed virtually the same as the MSCI Europe Index
The reality is that we buy stocks where the news flow and other fundamentals are good/improving. So, for example we managed to avoid many of the cheap stocks which suffered death by a thousand cuts to earnings forecasts such as oil stocks.
Our biggest winners in last quarter of 2024 were European two banks (), two insurers and then a diverse bunch including pharmaceuticals, fund management, oil, online betting and a lottery operator. Broadly speaking they were cheap with upgrades to forecasts, and we think finding companies like this and not worrying about a recession in Europe is the key question for investors.
