The Eurozone economy is faltering, with Germany, its largest economy, acting as a drag. In contrast, countries like Spain are experiencingnotable growth.

Eurostat, the European statistical office, has recently lowered its estimate for the second quarter. Economic growth in the Eurozone unexpectedly slowed down in the spring, with the Gross Domestic Product (GDP) increasing by just 0.2 percent compared to the previous quarter. Previously, growth had been estimated at 0.3 perccent. In the first quarter, the economy in the 20 countries of the common currency area had grown by 0.3 percent.

A Rate Cut is Almost Certain

At the upcoming ECB meeting next Thursday, anything beyond a 25-basis point cut to the deposit rate, bringing it to 3.50%, would be unexpected. Economists largely anticipate a gradual approach to rate cuts. According to a survey by «Bloomberg», 25-basis point reductions in quarterly increments are expected, with more significant differences in opinion emerging towards the end of 2025.

No major change in the outlook from ECB President Christine Lagarde is anticipated. The focus is expected to remain on data-driven decision-making.

A Tough Mix

The combination of slowing economic growth and persistent inflationary pressure, especially in services, presents a challenge for policymakers. The key question remains: where is the «neutral zone», where interest rates neither stifle nor stimulate the economy?

The ECB’s latest growth forecast of 0.9% for the year is likely to be downgraded. According to DWS economist Ulrike Kastens, «Weak domestic demand and a lack of improvement in industrial sentiment are likely to lead to a downward revision in the GDP projection.» No significant changes are expected for the following years.

Bank of America’s research aligns with this view: «ECB forecasts usually move slowly. While short-term growth may be slightly reduced and inflation in 2024 might increase, the medium-term outlook remains unchanged.» Only if economic data worsens significantly could the door open for more aggressive rate cuts.