Eurozone GDP stagnated in Q4 2024 as Germany (-0.2%) and France (-0.1%) contracted, reinforcing expectations of more ECB rate cuts. The euro held at $1.04, while bond yields fell. The ECB-Fed policy gap widens as Powell signals “no rush” for rate cuts.
ADVERTISEMENTThe eurozone economy grounded to a halt in the fourth quarter of 2024, as Germany and France, the bloc’s two largest economies, posted worse-than-expected contractions, reinforcing concerns over persistent economic weakness in the region.
According to preliminary data released by Eurostat on Thursday, eurozone gross domestic product (GDP) remained unchanged from the previous quarter, a sharp slowdown from the 0.4% growth recorded in the third quarter and below the 0.1% expansion forecast by analysts. This marks the weakest performance since the fourth quarter of 2023.
For the broader European Union (EU), GDP edged up 0.1% quarter-on-quarter. On an annual basis, seasonally adjusted GDP increased by 0.9% in the euro area and 1.1% in the EU, slightly improving from the previous quarter’s readings of 0.9% and 1.0%, respectively.
Germany and France disappoint, Portugal outperforms
The biggest drag on growth came from Germany and France, which both unexpectedly contracted.
Germany’s economy shrank by 0.2%, worse than the anticipated 0.1% decline, while France’s GDP fell by 0.1%, missing expectations of stagnation. Meanwhile, Italy’s economy remained flat for a second consecutive quarter, defying projections of a modest 0.1% increase.
On the other hand, some peripheral economies outperformed, with Portugal (+1.5%) leading the growth rankings, followed by Lithuania (+0.9%) and Spain (+0.8%).
The weakest performances were recorded in Ireland (-1.3%), Germany (-0.2%), and France (-0.1%).
“Once again, it is the periphery driving most of the growth, with particularly strong expansions in Portugal and Spain. France and Germany remain a drag, as both face well-documented structural and cyclical headwinds alongside political turmoil,” said Kyle Chapman, FX Markets Analyst at Ballinger Group.
ECB rate cut widely expected amid weak data: More to come?
The weaker-than-expected GDP figures strengthen expectations that the European Central Bank (ECB) will cut interest rates at its policy meeting today.
Markets are fully pricing in a 25-basis-point reduction to 2.75%, and predict four rate cuts expected by the end of 2025.
Frankfurt remains under pressure to continue its rate-cutting cycle to stimulate an economy that is visibly struggling, while inflation progresses towards the ECB’s 2% target.
ECB President Christine Lagarde is expected to stress that monetary policy alone is not sufficient to revive growth and that fiscal measures, alongside structural reforms, are needed to improve competitiveness.
Policy divergence between ECB and Fed widens
The ECB’s expected rate cuts highlight a growing monetary policy divergence with the US Federal Reserve, which kept rates steady between 4.25% and 4.50% at its Wednesday meeting.
Fed Chair Jerome Powell reiterated there is “no rush” to cut rates further, highlighting the resilience of the US economy.
“The eurozone economy is fragile, facing stagnant growth and rising recession risks. Q4 GDP data confirms near-zero growth, and PMI surveys indicate ongoing manufacturing contraction. In contrast, the US economy remains robust, driven by consumer spending, a tight labour market, and AI-driven investment,” said Boris Kovacevic, Global Macro Strategist at Convera.
ADVERTISEMENTMarket reactions
The euro remained steady around $1.04 in mid-morning European trading ahead of the ECB meeting. Sovereign bond yields fell across the eurozone, reflecting increased demand for safe-haven assets.
The benchmark German Bund yield dropped 6 basis points to 2.52%, while France’s 10-year OAT yield declined to 3.26%. Italy’s BTP yield slid 7 basis points to 3.60%.
Eurozone equities saw limited reaction, with the Euro STOXX 50 index rising 0.5%. Dutch semiconductor giant ASML Holding N.V. gained 3.3%, extending its 5.5% rally from Wednesday, after posting stronger-than-expected earnings and issuing an improved outlook.
Germany’s DAX index climbed 0.2% to a new record high, although Deutsche Bank shares slumped 3.4%, as investors reacted to stagnant revenue guidance and rising costs.
ADVERTISEMENTSpain’s IBEX 35 outperformed, rising 0.8%, led by gains in real estate and banking stocks.