Eurozone GDP stagnated in This fall 2024 as Germany (-0.2%) and France (-0.1%) contracted, reinforcing expectations of extra ECB fee cuts. The euro held at $1.04, whereas bond yields fell. The ECB-Fed coverage hole widens as Powell alerts “no rush” for fee cuts.
The eurozone financial system grounded to a halt within the fourth quarter of 2024, as Germany and France, the bloc’s two largest economies, posted worse-than-expected contractions, reinforcing issues over persistent financial weak point within the area.
In line with preliminary knowledge launched by Eurostat on Thursday, eurozone gross home product (GDP) remained unchanged from the earlier quarter, a pointy slowdown from the 0.4% progress recorded within the third quarter and under the 0.1% enlargement forecast by analysts. This marks the weakest efficiency for the reason that fourth quarter of 2023.
For the broader European Union (EU), GDP edged up 0.1% quarter-on-quarter. On an annual foundation, seasonally adjusted GDP elevated by 0.9% within the euro space and 1.1% within the EU, barely enhancing from the earlier quarter’s readings of 0.9% and 1.0%, respectively.
Germany and France disappoint, Portugal outperforms
The largest drag on progress got here from Germany and France, which each unexpectedly contracted.
Germany’s financial system shrank by 0.2%, worse than the anticipated 0.1% decline, whereas France’s GDP fell by 0.1%, lacking expectations of stagnation. In the meantime, Italy’s financial system remained flat for a second consecutive quarter, defying projections of a modest 0.1% improve.
Alternatively, some peripheral economies outperformed, with Portugal (+1.5%) main the expansion rankings, adopted by Lithuania (+0.9%) and Spain (+0.8%).
The weakest performances had been recorded in Eire (-1.3%), Germany (-0.2%), and France (-0.1%).
“As soon as once more, it’s the periphery driving many of the progress, with notably sturdy expansions in Portugal and Spain. France and Germany stay a drag, as each face well-documented structural and cyclical headwinds alongside political turmoil,” mentioned Kyle Chapman, FX Markets Analyst at Ballinger Group.
ECB fee lower broadly anticipated amid weak knowledge: Extra to come back?
The weaker-than-expected GDP figures strengthen expectations that the European Central Financial institution (ECB) will lower rates of interest at its coverage assembly in the present day.
Markets are totally pricing in a 25-basis-point discount to 2.75%, and predict 4 fee cuts anticipated by the top of 2025.
Frankfurt stays underneath stress to proceed its rate-cutting cycle to stimulate an financial system that’s visibly struggling, whereas inflation progresses in the direction of the ECB’s 2% goal.
ECB President Christine Lagarde is predicted to emphasize that financial coverage alone isn’t adequate to revive progress and that fiscal measures, alongside structural reforms, are wanted to enhance competitiveness.
Coverage divergence between ECB and Fed widens
The ECB’s anticipated fee cuts spotlight a rising financial coverage divergence with the US Federal Reserve, which saved charges regular between 4.25% and 4.50% at its Wednesday assembly.
Fed Chair Jerome Powell reiterated there’s “no rush” to chop charges additional, highlighting the resilience of the US financial system.
“The eurozone financial system is fragile, going through stagnant progress and rising recession dangers. This fall GDP knowledge confirms near-zero progress, and PMI surveys point out ongoing manufacturing contraction. In distinction, the US financial system stays sturdy, pushed by shopper spending, a good labour market, and AI-driven funding,” mentioned Boris Kovacevic, International Macro Strategist at Convera.
Market reactions
The euro remained regular round $1.04 in mid-morning European buying and selling forward of the ECB assembly. Sovereign bond yields fell throughout the eurozone, reflecting elevated demand for safe-haven property.
The benchmark German Bund yield dropped 6 foundation factors to 2.52%, whereas France’s 10-year OAT yield declined to three.26%. Italy’s BTP yield slid 7 foundation factors to three.60%.
Eurozone equities noticed restricted response, with the Euro STOXX 50 index rising 0.5%. Dutch semiconductor big 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 brand new report excessive, though Deutsche Financial institution shares slumped 3.4%, as traders reacted to stagnant income steerage and rising prices.
Spain’s IBEX 35 outperformed, rising 0.8%, led by positive factors in actual property and banking shares.