The European Central Bank (ECB) staff macroeconomic projections for the euro area, released in March 2025, paint a picture of cautious optimism tempered by significant uncertainties. While the projections highlight slower GDP growth, there are expectations that inflation will taper off.
The Eurozone’s labor market continues to be resilient and the ECB expects that productivity will pick up despite structural challenges. I provide a quick summary of the key highlights in the report below.
Economic growth faces challenges but shows resilience
The euro area is expected to experience slower economic growth in the coming years, primarily due to persistently high geopolitical and policy uncertainty. According to the ECB’s projections, GDP growth is forecasted to be 0.9% in 2025, strengthening to 1.2% in 2026 and 1.3% in 2027. These figures represent a downward revision of 0.2 percentage points for both 2025 and 2026 compared to previous projections.
Despite these challenges, the euro area economy shows resilience. The gradual improvement in growth rates over the projection horizon suggests that the region is capable of overcoming obstacles and adapting to changing circumstances. This resilience is crucial for maintaining stability and fostering long-term economic recovery.
Inflation expected to moderate
Inflation has been a key concern for policymakers and businesses alike. The ECB’s projections indicate that headline Harmonised Index of Consumer Prices (HICP) inflation has increased recently but is expected to moderate slightly in 2025. Inflation is projected to decline and hover around the ECB’s target of 2.0% from the first quarter of 2026.
Several factors influence this inflation outlook, including upward base effects in the energy component and higher food price inflation. The moderation in inflation is a positive sign, suggesting that the euro area is moving towards a more stable price environment. This stability is essential for fostering consumer confidence and supporting economic growth.
Investment and exports face uncertainty
Uncertainty regarding global trade policies, particularly between the United States and China, is expected to weigh on euro area exports and investment. This uncertainty, coupled with persistent competitiveness challenges, is projected to lead to a decline in the euro area’s export market share.
The impact of these uncertainties on investment and exports is a critical concern for policymakers. Ensuring that businesses can navigate these challenges and continue to invest in growth opportunities is essential for maintaining economic stability. The ECB’s projections highlight the need for strategic planning and policy measures to mitigate the effects of global trade uncertainties.
Productivity expected to pick up
Productivity in the euro area is expected to pick up over the projection horizon as some cyclical factors that have recently reduced productivity start to unwind. However, structural challenges remain, and addressing these challenges will be crucial for sustaining long-term productivity growth.
The anticipated improvement in productivity is a positive development, suggesting that the euro area is moving towards a more efficient and dynamic economic environment. However, the persistence of structural challenges underscores the need for ongoing efforts to enhance productivity through innovation, investment, and policy measures.
Summary
Overall, the projections offer a nuanced view of the region’s economic outlook. While there are significant uncertainties and challenges, the projections highlight areas of resilience and potential growth. The gradual improvement in economic growth, moderation in inflation, resilience in the labour market, and anticipated pick-up in productivity are encouraging signs for the future.
As Europe navigates through this complex economic landscape, strategic planning and effective policy measures will be essential for fostering stability and growth. The ECB’s projections provide valuable insights that can guide policymakers, businesses, and consumers in making informed decisions and preparing for the future.
