The European Commission (EC) downgraded its forecast for the European Union's (EU) gross domestic product, pointing to "key geopolitical risks" from the war in Ukraine and the Middle East.

Brussels expects the EU GDP to grow by a mere 0.8% this year and 1.5% in 2025 compared to a May forecast of 1.0% and 1.6%, according to a report published on November 15. The Commission noted weak household consumption for the expected lack of growth resumption.

"The outlook remains highly uncertain, with risks largely tilted to the downside," EC Commissioner Paolo Gentiloni said.

European gas prices rose to a one-year high and pushed investors towards safe havens as Russia lowered its threshold for using nuclear weapons and fired a hypersonic ballistic missile at Ukraine.

Gold was headed for its largest weekly gain in nearly eight months on Friday as the euro hovered at a 2-year low.

Consumer Confidence Dips, Hurting EU GDP Prospects

Global events have weighed on consumer confidence in the Euro Area. It decreased by 1.2 points to -13.7 in November 2024, according to EC preliminary estimates on Thursday. This is back below its long-term average and worse than market expectations of -12.4.

The EU faces "big uncertainties on the how and when the propensity to consumption will regain strength," Gentiloni said. "A still high cost of living and rising economic uncertainty pushed households to save an increasing share of their income," he added.

Meanwhile, the saving rate in Europe sits 12% above its pre-pandemic average at 15.7%, while the business profit share declined to 38.8%.

EU officials are wary about the impact that protectionist policies under President-elect Donald Trump will have on the bloc. New tariffs could severely impact European economies, particularly those with significant trade surpluses with America, like the Netherlands, Germany, France, Belgium and Italy.

The eurozone remains at risk of "a possible protectionist turn in US trade policy," Gentiloni said. Tariffs and import taxes "would be extremely harmful for both economies," he added.

The Commission expects Germany to fall into recession in 2024. However, it forecast that Italy, France and Spain will grow 0.7%, 1.1% and 3%, respectively.

"Growing trade conflicts and market uncertainty, against a backdrop of greater political fragmentation in the global economy, may exacerbate the challenges facing the German financial system, " Michael Theurer, member of the Executive Board of the Deutsche Bundesbank, said Thursday.

The Drag On Europe: Germany

Germany, the eurozone's largest economy, continues to be the primary drag on the region's growth. The Commission said that German GDP will contract by 0.1% in 2024 from a 0.1% expansion previously, the second consecutive year of negative growth.

"High uncertainty has been weighing on consumption and investment, and the trade outlook has worsened as global demand for industrial goods weakened," the Commission said in its Autumn Forecast.

Despite challenges, Germany is still expected to see a moderate recovery of 0.7% in 2025 and 1.3% in 2026, driven by domestic demand and real wage increases. Nonetheless, in its May forecast, the Commission expected the German economy to grow by 1.0% in 2025. Brussels said it expects slowing inflation to boost real household income and private consumption, albeit at a slower pace.

Inflation in Germany rose in October to 2.4% from 1.8% in September but is expected to fall to 2.1% and 1.9% in 2025 and 2026, respectively, on falling energy prices.

ING Says EC Forecasts Are Optimistic

Analysts at ING argue that the Commission's forecasts are "optimistic" when considering the structural vulnerability of Europe and Germany's struggling manufacturing sector, especially at a time marked by potential trade escalations for the country's exporters.

More realistic estimates by Consensus Economics predict the EU GDP will expand to 1.1% in 2025 instead of the Commission's 1.3% rate.

Despite the EU being expected to lag behind the US growth rate of 2.1% in 2025, Brussels pointed out in the report a widening economic divergence that could further strain Europe's economic landscape.

The economic gap between the US and the eurozone is expected to widen, with the US maintaining solid growth due to strong consumer spending and business investment.

The International Monetary Fund (IMF) raised its US growth from 2.6% in July to 2.8% for 2024 and from 1.9% to 2.2% for 2025. In contrast, it lowered the EU GDP from 0.9% to 0.8% and 1.5% to 1.2%, respectively.

European Industrials Offer Growth Opportunities

The IMF has echoed a report by Mario Draghi, a former ECB President. It suggested in September that a wider GDP gap between the US and the EU was "driven mainly "by a more pronounced" slowdown in productivity growth in Europe."

Demand for industrial goods in Europe has also weakened, according to the EC report. Investment in the industrial sector fell by over 2.5% in the first half of 2024 owing to high energy prices and soft export demand, hindering the Eurozone recovery.

Yet, research points out that the European industrial sector offers above-median profitability and earnings growth compared to Europe's growth sector. Industrials in Europe command fourfold the weight in the Russell 1000 Growth index, the comparable US tech benchmark.

"Persistent weakness in manufacturing is weighing heavily on growth for countries such as Germany and Italy," the IMF said.

Lack of Productivity Growth

Europe must increase public investment to improve its economic prospects and close the growth gap, the IMF stressed in its October World Economic Forum.

It suggested that a 1.5% increase in public investment could boost the EU GDP by 2.5% above estimates by 2030, pointing to higher deficits and government spending reallocation as a solution.

Labour productivity in the industry sector increased by only 0.8% in the Euro Area between Q4 of 2019 and Q1 of 2022, whereas in the US, it rose by 8.8%. A weaker output growth and rising unemployment from higher gas prices following the Russian war against Ukraine impacted the European industry more than the US.

"Europe is less hard-working, less ambitious, more regulated, and more risk-averse than the US, with the gap between the two continents only getting wider," said Norges Bank Investment Management Nicolai Tangen FT in an April interview.