ING has warned that the eurozone's apparent economic strength in early 2025 is misleading, as Ireland's outsized and distorted GDP figures have masked broader regional weakness. According to Peter Vanden Houte, Chief Economist for Belgium, Luxembourg and the Eurozone, 'Despite Ireland representing only around 4% of eurozone GDP, it contributed about half of the 0.6% GDP growth in the eurozone for the first quarter.'
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The sharp rise was fuelled by Ireland's pharmaceutical sector and accounting practices tied to foreign multinationals, which inflate GDP through tax-related booking of licensing revenues. 'This part of GDP does not represent any real economic activity in Ireland but still affects eurozone growth numbers,' Vanden Houte explained.
However, these effects are expected to balance out in coming quarters, especially after Irish manufacturing output plunged 13.7% month-on-month in April. ING noted that 'growth figures are likely to remain volatile.'
Outside the Irish distortion, the eurozone economy remains under strain. Manufacturing sentiment has improved marginally but remains vulnerable to new tariffs, particularly as US duties on steel and aluminium have doubled to 50%. Simultaneously, the services sector is showing signs of softening. 'Unemployment expectations rose in May to the highest level in five months,' said ING, predicting that this would likely 'increase the savings ratio and reduce consumer expenditure.'
ING has revised its eurozone GDP forecasts to 1.0% in 2025 and 0.9% in 2026, citing carry-over effects and limited short-term investment appetite due to ongoing uncertainty.
On the inflation front, there is some optimism. Headline inflation dropped to 1.9% in May, while core inflation eased to 2.3%. 'We now expect headline inflation to remain below 2% until the middle of next year,' said Vanden Houte. ING now forecasts inflation at 2.0% for both 2025 and 2026.
Following another 25 basis point cut in June, the European Central Bank appears poised to pause its rate-cutting cycle. ECB President Christine Lagarde remarked the central bank has 'nearly concluded a monetary policy cycle.' ING expects one more cut in September, after which rates are likely to hold steady 'for an extended period.'
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