Economics

Uneven growth in the eurozone

Despite Trump’s tariff chaos and the Chinese export glut, the eurozone economy grew by 0.3% in the third quarter compared to the previous quarter. Growth was particularly strong in Spain, at 0.6%. While the former problem children of the eurozone continue to grow robustly, it is now the large economies of Western Europe that are bringing up the rear in terms of growth. Economic output in Spain and Greece is now 10% higher than before the coronavirus pandemic. In France, the figure is only 6%. Germany continues to stagnate at pre-pandemic levels.

Overall, however, the eurozone economy surprised slightly on the upside in the third quarter and could even gain momentum next year. Supportive factors include the fact that the labour market in the eurozone remains stable despite subdued growth, uncertainty in the trade dispute with the US has eased, and the European Central Bank’s (ECB) interest rate cuts are increasingly having an impact on the real economy. In addition, rising fiscal spending, particularly in Germany, is expected to provide further tailwinds in 2026. Meanwhile, the greatest threat to the eurozone comes from political instability and high debt levels in France.

Germany: Reforms must accompany the fiscal package

The German economy did not grow in the third quarter. Exports had a negative impact, declining compared with the previous quarter. Capital expenditure, on the other hand, increased, possibly indicating the first effects of additional government spending, particularly in the defence sector. The mood in the German economy is currently mixed. In the service sector, companies assess the situation as significantly better than in the manufacturing sector. Here, high energy prices, the shortage of skilled workers, increasing Chinese competition and ongoing uncertainties in global trade continue to weigh on sentiment. German companies' assessment of the current situation has hardly improved recently. Expectations for the next six months, on the other hand, have risen significantly. This optimism is mainly due to the relaxation of the debt brake and the associated significant expansion of government spending. However, the government must continue to push ahead with reforms so that the additional spending does not just lead to a flash in the pan, but increases Germany’s potential growth. In this context, it is worrying that the coalition is shifting at least some of the investments from the core budget to special funds in order to close financing gaps. From an economic perspective, however, expanding debt only makes sense if the additional funds are channelled into additional investments to increase potential growth. Some minor reforms by the government, such as the investment booster, the construction turbo and the planned reduction in electricity tax are a step in the right direction. However, the rest of the pension package is currently not only causing frictions within the coalition, but also incomprehension among economists. Pensions must be put on a sustainable footing through radical reforms, and the rise in non-wage labour costs must be limited. This would not only improve intergenerational justice, but also strengthen Germany as a business location.

AI boom in the US comes at the right time for Trump

Supported by the boom in artificial intelligence, the US economy continues to show its robust side. The major US tech companies are expected to invest around 1% of gross domestic product this year. A significant portion of this will go into artificial intelligence. This economic boost is very welcomed by President Trump. As he continues his determined restructuring of the country, his policies are increasingly having a negative impact on the economy. Tariff and migration policies are slowing labour growth and driving inflation. The US government's increasing undermining of institutions will also erode the attractiveness of the US as a business location over time. In the medium term, we therefore expect trend growth to fall to 1.5%.

Fed with little room for interest rate cuts, ECB in twilight mode

The negative effects of Trump’s economic policy have so far been most noticeable in the labour market. The unemployment rate rose to 4.4% in September. This presents the Federal Reserve (Fed) with a difficult situation: on the one hand, the cooling labour market calls for interest rate cuts to support the economy, while on the other hand, US tariffs and Trump’s restrictive migration policy are causing inflation to rise, which would actually require a strict monetary policy. In addition, although the budget deadlock in the US ended on 12 November after 43 days, the economic data for October will be published late or not at all due to the shutdown. This comes at an unfortunate time, as the Fed is currently particularly dependent on an accurate picture of the situation in order to fine-tune its monetary policy. The labour market currently seems to be causing the Fed more concern than inflation. However, the ongoing price pressure leaves little room for interest rate cuts. We expect the Fed’s target range to be lowered to 3.25-3.5% by summer 2026.

In contrast to its US counterpart, the ECB is in a much more comfortable position. The inflation rate has been close to the 2% target for some time, while the eurozone economy is showing its robust side and is expected to gain further momentum in 2026. Thus, there is currently no reason for the ECB to lower its key interest rate further. The next interest rate move could even be an increase. However, it is likely to take until mid-2027 before rising inflation prompts the ECB to slowly raise its policy rate back towards 3%.