Euro area growth, inflation forecasts nudged higher at BofA

Bank of America has modestly upgraded its euro area GDP growth forecast for 2025 to 1.0% and inflation to 2.0%, driven by technical factors and improving external demand, though near-term expansion remains modest. BofA anticipates inflation will persistently undershoot the ECB's target beyond 2025, with core inflation easing to 1.8% by 2026-2027, leading them to delay expectations for 50 basis points of ECB rate cuts to December and March. Significant uncertainty persists regarding consumer spending and investment, suggesting a slow recovery and continued disinflationary pressures.

Analysis

Bank of America has modestly revised its euro area forecast, projecting GDP growth of 1.0% and inflation of 2.0% for 2025, though these upgrades are attributed largely to technical factors rather than a fundamental strengthening of the economy. The near-term outlook remains subdued, with weak internal demand in Germany, France, and Italy, and headwinds from trade developments, leaving Spain as a relative outperformer. The report signals a persistent undershoot of the European Central Bank’s inflation target beyond 2025, with inflation forecast at 1.5% in 2026 and 1.8% in 2027, and core inflation seen easing to 1.8%. Reflecting this lukewarm outlook, BofA has adjusted its ECB monetary policy expectations, now anticipating a rate hold in September and delaying 50 basis points of cuts until December and March, which would bring the deposit rate to 1.5% by the first quarter of 2026. The overall tone remains cautious, stressing that high uncertainty from fragile consumer spending, weak investment, and fiscal policy risks suggests the area's economic recovery will only materialize slowly.

Key Decisions for Investors

• Investors should adjust for a more patient ECB, as the forecast for rate cuts being delayed until December and March implies a more hawkish-for-longer stance that could support the Euro in the near term.
• A cautious approach to European equities is warranted, particularly for companies reliant on domestic demand in Germany, France, and Italy, while favoring firms with significant exposure to strengthening external demand or the more resilient Spanish market.
• The projection of a persistent inflation undershoot from 2026 onwards suggests disinflationary pressures remain dominant, which could present opportunities in longer-duration fixed-income assets once the near-term ECB policy path is fully priced in.
• Closely monitor incoming data on Eurozone consumer spending, investment, and the impact of the German fiscal push, as these are the key variables that will determine if the sluggish recovery can gain momentum.