Mon Dec 02 20:49:10 UTC 2024: ## Europe Faces Economic Headwinds in 2025 Amidst Trade Tensions and Political Uncertainty

**London, November 23, 2024** – The looming threat of US tariffs on European imports and ongoing political instability are casting a shadow over Europe’s economic outlook for 2025, according to a new report from RBC Wealth Management. Proposed 10-20% tariffs on all European goods by the incoming US president, coupled with potential 60% tariffs on Chinese goods (potentially redirecting Chinese exports to Europe), are expected to significantly hamper already weak growth.

The report highlights a decline in the HCOB Eurozone Composite Purchasing Managers Index (PMI), falling from a peak of 52 in May to 48.1 in November, indicating a contraction in economic activity. This weakening economic climate could force the European Central Bank (ECB) to accelerate its interest rate cutting cycle, potentially providing some economic support given Europe’s high interest rate sensitivity. However, the report cautions that this alone won’t solve the complex domestic and geopolitical challenges.

The recent collapse of Germany’s government adds to the uncertainty, raising questions about future fiscal policy. While investors hope for more effective leadership following upcoming German elections, RBC Wealth Management believes quick fixes are unlikely.

The report recommends a cautious approach to European equities, suggesting an underweight allocation due to near-term headwinds. However, it also advocates for active stock picking, focusing on world-leading companies in sectors like semiconductor manufacturing, engineering, industrial gases, and healthcare, given that a significant portion of listed European companies’ revenue comes from outside the region.

The ECB faces the added challenge of diverging economic growth across the Eurozone, with northern economies performing significantly worse than southern ones. The potential US tariffs are expected to lead to weaker output and higher prices, according to ECB Vice President Luis de Guindos. RBC Wealth Management forecasts a cumulative 100 basis points of rate cuts by the middle of 2025, viewing current market pricing of 125 bps as overly aggressive.

In the bond market, the report notes a widening yield differential between French and German government bonds, and maintains an underweight position in France while favoring Netherlands, Spain, Agencies, and multinational debt. A cautious and selective approach to European credit is also advised, with sectors exposed to US exports facing potential spread widening.

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