Eurozone economic outlook, May 2025
While there are signs of growth, the eurozone’s 2025 economic outlook remains mixed, driven by key challenges like elevated uncertainty from evolving trade relations and other structural issues
A better-than-expected start to 2025
After a slowdown toward the end of 2024, the eurozone economy began the new year with signs of renewed momentum, growing 0.4% in the first quarter (flash estimate).1 This growth was supported primarily by still-buoyant growth in Spain (0.6%, following 0.7% in the previous quarter),2 although economic activity also picked up in Italy (0.3%),3 Germany (0.2%),4 and Austria (0.2%).5 The labor market remained a key driver of stability, with unemployment reaching a record low of 6.2% in March, down from 6.5% a year earlier.6
The front-loading of exports to the United States might have supported the growth in the early months of the year, but it was likely not the only factor: While detailed economic data has not yet been published for most countries—or for the eurozone in aggregate—data from France7 does not suggest an export boost; data from Spain suggests only a moderate one;8 and the German Federal Statistical Institute noted positive contributions from private consumption and investments as some of the other drivers of positive growth, besides exports.9
Trade policy turmoil has had only a limited impact on the eurozone economy, so far. The composite purchasing managers’ index (PMI) dipped slightly to 50.4 in April—from 50.9 a month ago in March—remaining above the neutral threshold of 50.10 The manufacturing PMI showed marginal improvement, while services settled at the 50-line—signaling a further reduction in sectoral divergence for growth (figure 1).
Similar developments can also be observed in the European Commission’s economic sentiment indicator.11 The overall index declined by 1.4 points—but this deterioration mostly came from the consumer, retail, and service sectors, whereas sentiment in the manufacturing and construction sectors mostly stagnated.
Yet, the effects of higher tariffs from the United States, in general, are hard to estimate—and they might take some time to materialize. Altogether, Europe’s direct exposure is moderate, as EU goods exports to the United States represent around 20% of EU exports to countries outside the European Union,12 and only around 3% of the total EU economy.13 Nevertheless, the overall impact of the final US tariff structure might be substantive, as there may be various indirect effects including a possible softening of economic growth globally.14
Inflation on track, but outlook uncertain
Although inflationary pressures seem to be easing further, for the eurozone, uncertainty still reigns around the future trajectory of its economy. From January to March, headline and core (excluding energy and food prices) inflation softened as expected, prompting the European Central Bank (ECB) to announce a 25-basis-point rate cut in April—bringing the deposit facility rate to 2.25%.15
However, inflation data from April revealed complexities: While the harmonized index of consumer prices rose by 2.2%—aligning with the ECB’s target—both services and core inflation ticked upward, raising concerns about a disinflationary trajectory. Trade policy disruptions complicate this year’s outlook further, with potential downward pressures from falling energy and commodity prices, counterbalanced by risks of higher import costs due to supply chain disruptions. Depending on the data expected to come in, the ECB might choose to implement another rate cut in June.
Strategic initiatives for competitiveness and security
Given new complexities in the global geoeconomic landscape, issues concerning competitiveness and security have become urgent for Europe. At the end of January, the European Commission published its long-awaited “Competitiveness compass,”16 based on the recommendations of the Draghi report on European competitiveness.17
The compass identifies three main areas of action, or pillars, as follows:
- Closing the innovation gap: This is to be achieved by creating a friendly environment for young companies to start and expand (start- and scale-up strategy), helping companies to adopt new technologies (Apply AI initiative), and by simplifying rules and laws (28th legal regime), among other efforts.
- Decarbonizing the economy: Comprises integration of decarbonization efforts (Clean Industrial Deal) with industrial, economic, and trade policies, and facilitating access to affordable energy.
- Reducing dependencies: This is to be achieved through policies, partnerships, and investments to ensure economic security and resilience as well as strengthening defense industry capabilities and preparedness.
Such a push of initiatives, if undertaken as planned, should make Europe more economically resilient and future-proof.
Defense spending is also expected to rise substantially: The “ReArm Europe/Readiness 2030”18 plan, introduced in March 2025, outlines a comprehensive strategy to finance increased defense expenditures.19 Key elements include a national escape clause within the Stability and Growth Pact—a 150-billion-euro loan instrument—and expanded European Investment Bank lending facilities for defense and security projects. Major economies like Germany, France, and Italy have already reported willingness to boost their defense budgets, signaling a unified approach to addressing possible security challenges.
Navigating an uncertain future
Looking ahead, the eurozone’s economic outlook remains subdued for 2025. Growth is expected to slightly soften in the coming quarters due to heightened uncertainty stemming from trade policy developments (figure 2). Probably more than the US tariffs themselves, it is this uncertainty that poses a significant challenge for the eurozone—particularly for business sentiment and investment.20
On the positive side, less restrictive monetary policy and increased public spending are likely to support economic activity. Manufacturing indicators have shown resilience, partly reflecting optimism around expanded defense and infrastructure investments. While the full impact of these initiatives will unfold over the coming years, the NextGen EU Funds21 are expected to provide a moderate boost to economic growth in 2025, particularly in southern eurozone countries like Italy and Spain.22
Overall, the eurozone economy is projected to grow by 1% in 2025,23 up from 0.9% in 2024. Stable labor market conditions, robust income growth, and lower interest rates are expected to drive gradual increases in consumer spending—despite elevated uncertainty. Expansive fiscal policy and lower financing costs should further support investment activity, although the rapidly evolving trade policy landscape remains a key challenge.