Europe's current economic landscape is marked by a blend of resilience and challenges, as the region seeks to rebound from inflationary pressures and fiscal uncertainty amidst ongoing geopolitical tensions. Various economic indicators have signalled that growth in Europe is expected to grow at a slower pace than previously forecast. Economic growth increased by 0.3% during Q3 2024, and Capital Economics anticipates a 0.3% growth for Q4 2024. As a result, GDP is expected to expand by only 0.8% in 2024, with a further 1% forecast for 2025.

Eurozone inflation ticked up slightly more than expected in October to 2.0%, mainly due to energy and food prices. While higher than the 1.7% recorded in September, inflation is broadly back to the European Central Bank’s (ECB) target rate. Services inflation remains above target at 3.9%, though stable from September. Headline inflation is expected to average 1.5% in 2025. 

As a result of falling inflation, down from the peak of 10.6% in October 2022, the ECB cut interest rates by a further 25 bps to 3.25% in its October meeting. In light of worsening economic conditions, Capital Economics now forecasts back-to-back 50 bps rate cuts in December and January to take the deposit rate down to 1.5% by mid-2025. 

Inflationary pressures from the labour market are likely to have a continued impact on the economic outlook, as the eurozone unemployment rate reached historic lows of 6.3% in September. However, employer hiring sentiment has moved into negative territory for the first time since March 2021, as employers are proceeding with caution.

Eurozone consumer confidence rose to -12.5 during October 2024, the highest level since early 2022, as inflation has fallen and wage growth increased. Consumer confidence now falls, only slightly, short of the long-term average. 

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