Europe’s two largest economies, Germany and France, experienced a contraction at the end of last year, as government instability dampened business and consumer confidence.
Fourth-quarter gross domestic product fell by a bigger-than-expected 0.2% from the previous three months in Germany, and by 0.1% in France, data Thursday showed, News.Az reports, citing Bloomberg.Italy and Austria both stagnated.
The frailty is weighing on the wider region, where Germany’s manufacturing malaise has long been a drag and investors are braced for punitive trade measures from US President Donald Trump. Fourth-quarter figures for the 20-nation bloc, due later Thursday, are expected to show minimal growth.
Some help is on the way from the European Central Bank, which is widely expected to cut its deposit rate by another quarter-point today, to 2.75%. But policymakers in Frankfurt still have an eye on inflation. Separate data showed Spanish consumer prices rose 2.9% this month — more than analysts had expected.
“The big picture is that momentum has ebbed, supporting the case for ECB rate cuts this year — we expect 100 bps of easing.”
For Germany, the disappointing data come less than a month before a snap election that’ll probably see Chancellor Olaf Scholz ousted by Friedrich Merz, who leads the conservative CDU/CSU bloc and is promising lower taxes and fewer regulations.
While some hope that the Feb. 23 ballot will bring more growth-oriented policies capable of helping drag Europe’s largest economy and the 20-nation euro zone as a whole out of their respective ruts, many analysts are skeptical.
Highlighting the problems facing companies, tire and component maker Continental AG said this week that its automotive unit will struggle to increase sales in 2025 due to a “challenging market environment” and is cutting costs to try to buoy profitability.
Germany saw gross domestic product shrink for a second consecutive year in 2024 and the government on Wednesday revised down its 2025 growth outlook to just 0.3% from 1.1%.
In France, where analysts had only expected the economy to stagnate, the tailwinds from last summer’s Paris Olympics have long faded. Activity was curtailed by slower consumer-spending growth and a stagnation in business investment.
The overarching issue is a budget crisis that’s forced the government in Paris to rely on stopgap legislation to avoid a shutdown. The economic fragility is complicating matters, with poor tax revenue and soft growth pushing last year’s fiscal shortfall to about 6% of output.
Talks on a full 2025 budget are set to culminate next week, when new Prime Minister Francois Bayrou’s tax-and-spend plans will face a vote that could force him to resign.
French companies are increasingly airing their frustrations, with Bernard Arnault, the billionaire chief executive of LVMH Moët Hennessy Louis Vuitton SE, saying this week that the extra corporate taxes in the government’s budget risk pushing investment abroad.
“There is a real deterioration in France’s economic situation,” Patrick Martin, the chief of Medef business group, told the AJEF press association Wednesday. “There’s disbelief in our ranks about what is happening in politics, and sometimes anger.”
There are some brights spots in Europe — namely Spain, which reported a 0.6% jump in GDP on Wednesday and remains the region’s standout performer. Lithuania also recorded strong growth of 0.9%.
