Yesterday, the ECB lowered its GDP forecasts for this year and next, confirming a downward trend in forecast revisions.US tariffs and fiscal stimulus in Germany represent opposing risks for GDP trajectory.
Yesterday, the ECB cut interest rates by a further 25bp, as had been widely expected. Monetary policy was described as “meaningfully less restrictive”, which seems to reflect a compromise between hawks and doves as interest rates approach, or enter, the upper end of a “neutral” range. The new macroeconomic forecasts showed somewhat higher inflation for this year amid higher energy price-assumptions, and a further downward revision to the growth trajectory.
Our chart shows the evolution of the ECB’s GDP growth forecasts for 2025 and 2026 since they were first published (December 2022 for the former, December 2023 for the latter). The trend has been pointing downwards for both forecasts, signaling that the ECB has been consistently too optimistic about the eurozone growth outlook. The ECB now expects a GDP growth of 0.9% in 2025 and 1.2% in 2026, in line with our forecasts. It is true that the ECB does not have a growth mandate, nor has the steady undershooting of economic activity compared to its forecasts translated into a similar overprediction of inflation, partly because the labour market has held up much better than one would have expected given the deteriorating growth outlook. That said, the renewed downward revision to the GDP forecast should keep the ECB on guard because the more economic weakness persists, the larger the risk of a downshift in the labour market and, ultimately, in medium-term inflationary pressure.
We expect rate cuts to continue, but the extent of further easing critically hinges on how the Governing Council (GC) assess two major sources of risk. On the one hand, we see a rising likelihood that US tariffs on EU goods will be more disruptive than we currently assume in our baseline scenario, which would likely have dovish implications for monetary policy. On the other hand, surprisingly large fiscal stimulus in Germany would lift activity and inflation, and support the claim of the hawks of the GC that the level of R-star might end up being higher than generally assumed. Overall, we suspect that the latter effect might prevail.
US labour market probably stabilised in February We expect nonfarm payrolls rose around 150k in February, little changed from the 143k increase in January. Severe weather, which weighed on January payrolls, largely persisted through the February survey reference week. Timelier indicators of labour demand have shown signs of stabilisation (including Indeed job postings, NFIB hiring intentions, and continuing claims), while layoffs have remained low. DOGE-driven cuts to federal jobs are unlikely to impact the February data. With immigration slowing over recent months, the rise in employment needed to absorb population growth is easing. We expect the unemployment rate probably held at 4.0%, with average hourly earnings rising 0.3%
