2025 outlook – the consequences of interest rate easing
Since the middle of this year, Western central banks have been lowering their key interest rates.
Commerzbank Economic Research
11/15/2024
Rates are no longer rising, but falling
The high inflation of 2022 forced the western central banks to raise their key interest rates massively. The Federal Reserve, for example, raised its key interest rate from 0.25 to 5.5%, while the ECB increased it from -0.5% to 4.0%. This tightening of monetary policy caused economic indicators such as the purchasing managers' index to slump, especially in 2022.
Since mid-2024, key interest rates have been falling again. The ECB and the Fed have each lowered them by a total of 75 basis points, and the futures markets are pricing in further rate cuts. This turnaround in interest rates is significantly improving economic conditions. From spring onwards, survey based sentiment indicators should recover. However, the various economies are likely to react differently to the monetary easing, depending on structural problems, fiscal policy and other factors.
Germany: Erosion of competitiveness dampens effect of monetary easing
The leading indicators for Germany, which have been falling since spring 2024, point to a difficult winter half-year, during which German GDP will at best stagnate. But the easing pain from past monetary policy tightening suggests a certain economic upturn from spring onwards also in Germany – especially since around two-thirds of the energy price shock of 2022 will have been reversed and private consumption has finally started to recover somewhat after the decline in inflation.
But because of the erosion of Germany as a business location since the Merkel years, many companies are disillusioned and reluctant to invest in Germany, especially since the next federal government could consist of parties that, like the parties forming the traffic-light coalition (i.e. SPD, FDP and Greens), have no common ideas about the necessary economic policy reforms. In addition, there is the waning demand from China, which had for a long time given Germany tailwinds. The economic recovery driven by monetary policy is therefore likely to be significantly dampened. We expect growth of just 0.2% in 2025 and 1.0% in 2026 (or just 0.7% in 2026 when adjusting for the unusually high number of working days in that year).
For full text see attached PDF-Version.
