Investing.com -- The economic outlook for Europe in 2025, as assessed by analysts at BofA Securities, underscores a complex mix of challenges and opportunities, reflecting a landscape marked by fiscal policy shifts, trade uncertainties, and inflationary dynamics.
Key insights from their latest research suggest a year defined by divergent trajectories across the Euro area, the UK, and individual member states.
In the Eurozone, growth is projected to hover around 0.9% in 2025, underpinned by mild cyclical recovery driven by consumption.
This recovery benefits from the ongoing disinflation process, which supports real wage gains, albeit only until the latter half of the year.
However, business investment is expected to remain subdued due to heightened trade uncertainties and constrained medium-term demand.
The European Central Bank is anticipated to continue its rate-cutting cycle, with the deposit rate potentially falling to 1.5% by September 2025, as the ECB grapples with weak economic momentum and persistent inflation undershooting its targets.
Inflation in the Euro area is forecasted at 1.6% in 2025, reflecting the impact of lower energy prices and a subdued demand environment.
Analysts believe this will further manifest as a chronic output gap and an overly restrictive policy mix.
Despite these challenges, the possibility of a pan-European fiscal policy overhaul or a German-led rethink could offer upside potential, though these remain uncertain given the region's current political and economic climate.
The UK's economic trajectory reveals a slightly different narrative. Growth expectations for 2025 stand at 1.5%, bolstered by fiscal easing measures introduced in the October 2024 budget.
However, inflation risks persist, with projections suggesting inflation will remain above target until mid-2026, driven by wage growth and policy-related pressures.
The Bank of England is expected to proceed cautiously with rate cuts, aiming for a terminal rate of 3.5% by early 2026.
Meanwhile, risks related to potential US-imposed tariffs and global trade uncertainties could further complicate the outlook, impacting trade and consumer sentiment.
On a country-specific level within the Euro area, Germany and France face particular challenges.
German growth forecasts have been downgraded to 0.4% in 2025 due to ongoing fiscal rigidity and labor market pressures, while in France, political uncertainties surrounding the budget could exacerbate economic fragility.
Italy and Spain show relatively stronger performance, with Spain continuing to outpace other major economies in the region, due to government spending and tourism, although its long-term fiscal challenges linger.