ECB holds its breath as Eurozone growth falters
The Eurozone economy only grew by 0.1% in the second quarter of 2025, a concerning fall from the 0.6% GDP growth recorded in the first quarter (following a revision in June).
The outlook for the European economy now looks mixed. Inflation appears to have been tamed, and the European Central Bank’s culmination of interest rate cuts, taking the rate to 2%, has given the Eurozone economy the opportunity to grow. Nonetheless, we have now (almost) reached the ECB’s terminal rate. Despite a continuing need to reignite the Eurozone economy, rate cuts beyond 1.75% are very unlikely. Geopolitical volatility, global economic tension, and inflationary pressures all have the potential to destabilise the European and global economies and will deter the Bank taking rates much lower.
The near and below zero rates that defined over a decade of European monetary policy following the Global Financial Crisis may have been deemed necessary at that time but are not where the ECB will look to return to in today’s economic climate.
Yet, growth forecasts are not strong and global trade frictions continue to cast a shadow over economic recovery. It remains to be seen how the US-EU trade deal will affect exports from the bloc. The deal has dodged the harshest tariffs of EU goods, with threatened 30% tariffs halved to 15%, but this is still a considerable increase on pre-existing arrangements. Both the German Chancellor and French Prime Minister have heavily criticised the deal, and investors are betting on it hurting the Eurozone economy.
Forecasters predict that GDP growth in the Eurozone will gradually rise over the next two years, but in the near term, gains are expected to be modest. Government spending is expected to play an important role in any further growth in 2025, as public sector investment, especially in infrastructure and defence, will provide a boost that the economy desperately needs.
Despite forecasts for European growth remaining low, albeit slightly more promising than earlier in the year, strong wage growth and low unemployment, combined with higher inflation than the 2010s, means that Europe faces an entirely different economic environment where the emergency monetary policies of near-zero rates are not the answer. The economy might not be growing at any great pace, but it is at least relatively stable.
What about Ireland?
On an annual basis, the eurozone economy grew 1.5% and all countries' economies expanded, led by Ireland, where GDP increased 16.2%.
At the moment, Ireland is operating close to full employment, but there are still challenges holding us back. Recently, Amazon paused a project because of electricity supply issues. That is one example of the broader problems we are facing, including labour shortages, housing constraints, planning delays and gaps in our utility’s infrastructure.
At the same time, the Minister for Finance has made an important point about not depending too heavily on corporation tax. Revenues are still well above target, largely due to pharmaceutical exports ahead of expected tariffs, but they remain unpredictable and should not be seen as a long-term safety net.
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