After an expected 0.8% growth in 2024, the European Central Bank (ECB) just cut its growth forecast for the EU for 2025 to 1.1%. However, despite this downbeat outlook, investment analysts see some bright spots.

While Goldman Sachs expects an area-wide growth of 0.8% for 2025, notably below the 1.2% consensus, they see “several reasons for continued growth, rather than a Euro area recession”.

„Growth momentum remains modestly positive; consumption is likely to recover given rising real incomes and elevated savings; and we expect the South to show continued resilience compared with the North,” says the Euro Area Outlook 2025.

While Goldman Sachs expects Spain to outperform again, Germany, Italy (0.6%) and France are projected to have the weakest growth.

The subdued growth and easing inflationary pressure are likely to prompt the European Central Bank to cut interest rates further.

Europe Outlook: Equities

For European equities, asset managers see stumbling blocks and risks, such as the Trump 2.0 presidency, China’s weakness, the regional economic slowdown, higher energy prices and the war in Ukraine.

“However, these are already reflected in share prices in the form of high-risk premiums. Europe is currently trading at a record-high valuation discount of around 40% to US equities on a P/E basis,” points out Berenberg. They see opportunities particularly in European small caps.

Deutsche Bank sees bright spots in German equities. “In 2025, we expect high-single-digit earnings growth in Europe, which, coupled with low valuations, should provide moderate return prospects. Financials and industrials stand out favourably as our sector picks. We expect the STOXX Europe 600 to reach 525 points by the end of 2025 and see the DAX at 20,500 points,” says Christian Nolting, Global CIO at Deutsche Bank.

Lazard Asset Management is equally optimistic for European Equities, saying that investors can draw some comfort from the recent shift in the interest rate environment. “We believe looser monetary policy could serve as a tailwind for European equity prices over the near term, especially since European companies and consumers are generally more rate-sensitive than many of their global counterparts,” opine the Lazard analysts.

They highlight that declining cost of capital could benefit cyclical sectors like chemicals and commodities, where valuations appear “overly discounted” relative to their long-term potential.

Europe Outlook: Bonds

For bonds, the investment landscape is unlikely to be hostile next year, opines Pictet Asset Management.

The investment team highlights the UK, for instance. “We expect gilt yields to fall to 4% from the current 4.4%, supported by a more favourable inflation outlook compared with the rest of Europe,” writes the Pictet Asset Management Strategy Unit and adds: “Notably, the spread between UK and German ten-year bond yields has risen above 200 basis points – matching the historic peaks during the sterling crisis of the early 1990s and the budget crisis of 2022.”

Lazard also sees a positive environment for European bonds amid easing rates, with a preference for Nordic high yield debt given strong fundamentals and higher spreads.

“Overall, looser monetary policy and declining yields contribute to a more constructive backdrop for European bond investors going forward,” concludes David Zahn, Head of European Fixed Income at Franklin Templeton. However, he remains cautious given a “significant divergence between European countries in terms of economic growth and political stability—with notable elections coming up in Germany and France”.