Economic Outlook

January 2025 Forecast

Lower inflation and interest rates to drive growth

Falling inflation, driven by lower energy and goods prices, should allow the ECB to cut its main refinancing rate by 100bps by the end of the year. Lower inflation will boost real wages and increase consumption.

Mid-year review

• The expected consumer-led recovery is still underway, but at a slower pace. Falling interest rates and rises in real incomes are still supportive of consumer spending.
• Following four 25bps cuts so far this year, we now anticipate the ECB will make one further rate cut of 25bps towards the end of the year, putting the main refinancing rate at 1.9% as inflation continues to hover around 2%.
• We expect the BoE to cut rates three times before year end to put rates at 3.5%, as inflation is expected to peak in September and then begin to oscillate towards 2%.

January 2025 Forecast

Labour market tightness will be a growth constraint

Low unemployment and rising real wages will continue to boost consumption, but tight labour markets may constrain long-term business expansion. Supply side reforms and increased productivity may be necessary to sustain economic growth.

Mid-year review

• The rapid pace of policy changes has lowered business sentiment and long-term growth expectations. In turn, we have revised our employment forecasts down as firms remain cautious, limiting employment growth in the medium-term.
• We expect that the large fiscal stimulus package in Germany will help offset the potential negative drag from weaker trade.

January 2025 Forecast

Rising uncertainty keeps risks high

Political instability and continued geopolitical tensions pose a risk to inflation expectations and economic sentiment. Possible tariffs from the U.S. could be a downside risk to the global outlook.

Mid-year review

• U.S. President Trump and President of the European Commission, Ursula von der Leyen, have negotiated a deal in principle of a 15% tariff on almost all European exports to the U.S., except for steel, aluminium, and pharmaceuticals. A UK deal was reached in May that set a 10% tariff on UK exports to the U.S., with some exceptions and exemptions.
• The prospect of lower inflation and policy rate cuts has helped reverse the increases in longer-dated debt costs that followed the German fiscal policy announcement in March. However, increased global uncertainty continues to be a downside risk to our outlook.

Outlook softened by indecision

Downward revision in growth forecast

Optimism from H2 2024, which was factored into our original 2025 projections, has fallen back in the face of current global tensions.

Central and Eastern European economies are forecast to see the strongest growth as their economies continue to build momentum.

Strong monetary and fiscal policy responses have helped maintain European momentum as policy rates continue to fall and public spending boosts investment.

Bond yields to remain elevated

Early in the year, the prospect of lower inflation and policy rate cuts helped reverse the increases in longer-dated debt costs that followed the German fiscal policy announcement in March.

Through the rest of the year, higher global inflation concerns mean we now expect long rates to be elevated in the medium-term relative to previous cycles.

Figure 1: Forecast expectations for 2025 by forecast vintage

Figure 2: Ten-year government bond yields and forecast (%)