The latest data shows that the eurozone's economic recovery is under significant pressure, with expectations for interest rate cuts intensifying. Last week's December manufacturing PMI final readings indicate that manufacturing activity in the eurozone remains in a contraction phase, at a rate faster than previously anticipated. While Germany's manufacturing PMI matched initial estimates, its unemployment rate slightly increased. According to the German Federal Ministry of Labor, unemployment in December 2024 reached 287,000, an increase of 33,000 from November, with the unemployment rate rising by 0.1%.
Several analysts believe that Europe will face "a tough year" in 2025. Neil Shearing, Chief Economist at Capital Economics, pointed out that Europe's issues have shifted from smaller economies like Greece to the major economies of Germany and France. Without fundamental reforms, the European economy may face ongoing recession.
Expectations for Rate Cuts Strengthen; CPI Data this Week is Key
Economic weakness and potential trade wars are intensifying market expectations for ECB rate cuts. Yannis Stournaras, Governor of the Bank of Greece, stated last week that the ECB's main rate is expected to fall to 2% by autumn 2025. This statement aligns with the market's expectation of a full-year rate cut of 100 basis points.
The market is highly focused on the preliminary December CPI for the eurozone, set to be released this Tuesday. According to FactSet forecasts, the overall inflation rate for December might grow by 2.4% year-on-year, up from 2.2% in November; core inflation is expected to increase by 2.7% year-on-year, remaining stable from the previous month. This will provide crucial guidance for the ECB's rate decision on January 30th.
Although the market broadly predicts that the ECB will continue to cut rates at the end of January, there is still debate on whether rates will drop below 2% in 2025.
Limited Impact of Rate Cuts; Focus on the Service Sector
Typically, rate cuts stimulate consumption, but against a backdrop of low economic confidence and increasing trade uncertainties, cyclical consumer sectors like automotive, real estate, and luxury goods in Europe may find it challenging to benefit from rate cuts. In contrast, tourism and consumer services might become the main highlights in European stocks.
Joachim Klement, a strategist at Panmure Liberum, believes that due to manufacturing weaknesses and insufficient export demand, service industry companies will become more important in the future. Looking forward to 2025, market attention will shift more towards the service sector rather than industrial or consumer goods fields.
The Euro May Fall to Parity with the Dollar in the Second Half of the Year
With weak economic data and heightened expectations for rate cuts, the euro is under devaluation pressure. Analysts suggest that the euro may fall to parity with the dollar in the first half of 2025. This week's CPI data and the ECB's decision at the end of the month will be crucial factors in determining the euro's short-term trend. Investors need to closely monitor eurozone economic indicators and policy developments to manage the risks and opportunities arising from market fluctuations.
