Investing.com -- The Eurozone economy faces a delicate balancing act in 2025, with growth expected to stabilize but numerous uncertainties looming, according to UBS.
The bank's analysts believe the key questions for the region's economy revolve around consumer spending, inflation, external trade risks, and the impact of political shifts.
They explain that a primary area of focus is whether the consumer recovery will gain momentum.
UBS anticipates that "growth this year to come in near trend at 0.9%" as "household consumption" gains traction, fueled by strong wage growth and falling interest rates.
As the most critical driver of economic activity in the region, UBS says a robust consumer spending recovery could lay the foundation for a more sustainable expansion, despite challenges elsewhere in the economy.
However, they add that the prospect of renewed trade friction with the U.S., particularly under President-elect Trump, remains a significant concern.
UBS warns that tariffs, particularly on the EU's exports of goods, could hurt the economy, though the analysts suggest that the impact would likely be contained.
A scenario of "selective tariffs" targeting specific sectors might lead to a modest GDP loss of 0.2-0.5%, according to the bank. Still, UBS does not foresee these risks tipping the Eurozone into recession.
On the monetary policy front, the European Central Bank (ECB) is expected to continue easing rates, potentially bringing the deposit rate down to 2%. While inflation pressures have receded, UBS says the risk of further economic challenges could prompt additional rate cuts, though the risks to this outlook are deemed "balanced."
In the political sphere, upcoming elections in Germany and ongoing instability in France could introduce further uncertainty.
UBS suggests that a shift in Germany's leadership could bring about a "more decisive approach to economic policy." Meanwhile, the ongoing war in Ukraine also remains a wildcard, with any shift toward peace potentially lifting sentiment in Europe.