Global Insight 2025 Outlook: Europe

Analysis
Insights

Trade and internal tensions are likely to play key roles in 2025, as potential tariffs and political disruptions cloud the picture.

Share

December 2, 2024

By Frédérique Carrier, Rufaro Chiriseri, CFA and Thomas McGarrity, CFA

  • A Trump presidency brings additional challenges to Europe, dimming the outlook for the region’s equities despite undemanding valuations.
  • We think markets will continue to price in meaningful monetary policy easing from the European Central Bank until there is further clarity on U.S. tariffs.

European equities

Incoming U.S. president Donald Trump’s proposed 10 percent–20 percent blanket tariffs on all European imports bring considerable uncertainties. Tariffs would be a headwind to already meagre economic growth, even if not applied in their entirety. Europe is a very open economy and has a large goods trade surplus with the U.S. Moreover, should Trump proceed with imposing 60 percent tariffs on China, the latter may redirect its exports to other countries, potentially increasing competition further for Europe in these markets. Overall, European business sentiment is likely to suffer, in our view.

Such challenges could convince the European Central Bank to accelerate its interest rate cutting cycle. Given the tight monetary conditions of late, this could support the European economy, especially due to its high sensitivity to interest rates. Nevertheless, the domestic and geopolitical environments are complex and challenging for 2025, in our view.

The European recovery seems to have petered out in mid-2024

HCOB Eurozone Composite Purchasing Managers’ Index (PMI)

HCOB Eurozone Composite Purchasing Managers Index (PMI)

The line chart shows the HCOB Eurozone Composite Purchasing Managers Index (PMI), an economic activity indicator, during 2024. From 47.6 in January, the PMI rose above 50 and entered expansionary territory in March, then peaked at roughly 52 in May. It has since trended lower to a value of 48.1 in November.

Source – RBC Wealth Management, Bloomberg; data as of 11/22/24

The circumstances could prompt the EU to act with a sense of greater urgency to implement reforms to revitalise the economy and boost productivity. Investors hope that German elections in 2025 will result in more functional leadership, and that the newly appointed EU Commission and other national leaders will step up to promote unity. However, there are no quick fixes to the situation, from our vantage point.

Although the challenges seem reflected in modest equity valuations, we believe the notable near-term headwinds warrant holding a modest Underweight allocation in European equities.

Yet we believe Europe is a region primed for active stock picking rather than taking a passive index approach, as its equity market is not representative of its economy. Today, as much as 60 percent of listed European companies’ revenues derive from outside the region.

We would focus on world-leading companies that benefit from and drive global structural trends, particularly in niches such as semiconductor manufacturing equipment, electrical and mechanical engineering, industrial gases, and health care.

European fixed income

The European Central Bank (ECB) has to contend with diverging national economic growth, as the outlook for northern economies is markedly weaker compared to that of southern economies. The ECB will be weighing the potential 10 percent–20 percent U.S. tariff, which would be a significant blow to European exports. According to ECB Vice President Luis de Guindos, the imposition of U.S. tariffs would lead to weaker output and stronger price pressures, and disrupt the established trade flow. The tariff impact, and the response from the European Union, are difficult to gauge at present. We expect tariff negotiations; therefore, the impact will not be immediate, in our view. Against the pre-existing backdrop of weakening growth, we expect a cumulative 100 basis points (bps) of rate cuts from December through H1 2025 and view current market pricing of 125 bps as too aggressive. With output risks tilted to the downside, we think the Governing Council may be more comfortable easing policy at a slower pace should the potential tariffs be watered down.

French risk premium remains elevated

Yield differential between French and German bonds remains above year-to-date averages

Yield differential between French and German bonds

The line chart shows German and French government bond yields since January 2024. The last data point shows German and French yields are 2.23% and 2.84%, respectively. The yield differential between French and German bonds is wider than it was at the beginning of the year.

  • German Bunds
  • French government bonds

Source – RBC Wealth Management, Bloomberg; German and French bond yields represented by the Bloomberg Euro Aggregate Treasury Indexes; data as of 11/13/24

The recent collapse of Germany’s government raises the possibility of the country adopting a more stimulative fiscal policy, and until there is clarity on future government policy, Bund rallies could be limited. We maintain an Underweight position in France and prefer allocations in The Netherlands, Spain, Agencies, and Multi-national debt due to attractive spreads over Bunds, and we continue to favour Greece over Italy among lower-rated nations.

European credit valuations on a one-year basis appear rich, with lower-quality credit spreads tightening the most. Company fundamentals and strong demand will likely support spreads in the near term, but sectors exposed to U.S. exports such as Autos, Industrials, and Materials could drag spreads wider from current levels. Thus, we think it’s prudent to have a cautious and selective approach.

View the full Global Insight 2025 Outlook here 

Let’s connect


We want to talk about your financial future.


This publication has been issued by RBC’s Wealth Management international division in the United Kingdom and the Channel Islands which is comprised of an international network of RBC® companies located in these jurisdictions and includes RBC Europe Limited and Royal Bank of Canada (Channel Islands) Limited. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by RBC’s Wealth Management international division.

This publication has been compiled from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, the value of investments and income arising can go down, future returns are not guaranteed, and an investor may not get back the amount originally invested. Countries throughout the world have their own laws regulating the types of securities and other investment products and services which may be offered to their residents, as well as the process for doing so. As a result, any securities or services discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.

This material is prepared for general circulation and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law none of the entities which comprise the international division of RBC Wealth Management nor any of their affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Wealth Management.

Clients of RBC Europe Limited may be entitled to compensation from the UK Financial Services Compensation Scheme (FSCS) if it cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. For further information about the compensation provided by the FSCS scheme (including the amounts covered and eligibility to claim) please refer to the FSCS website FSCS.org.uk. Please note only compensation related queries should be directed to the FSCS. Royal Bank of Canada (Channel Islands) Limited is not covered by the UK Financial Services Compensation Scheme.

RBC Europe Limited is registered in England and Wales with company number 995939. Its registered office is 100 Bishopsgate, London EC2N 4AA. RBC Europe Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Royal Bank of Canada (Channel Islands) Limited (“the Bank”) is regulated by the Jersey Financial Services Commission in the conduct of deposit taking, fund services and investment business in Jersey. The Bank’s general terms and conditions are updated from time to time and can be found at https://www.rbcwealthmanagement.com/en-eu/terms-and-conditions. Registered office: Gaspé House, 66-72 Esplanade, St. Helier, Jersey JE2 3QT, Channel Islands. Deposits made with Royal Bank of Canada (Channel Islands) Limited in Jersey are not covered by the UK Financial Services Compensation Scheme. Royal Bank of Canada (Channel Islands) Limited is a participant in the Jersey Bank Depositors Compensation Scheme. The Scheme offers protection for ‘eligible deposits’ up to £50,000 per individual claimant, subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000 in any 5 year period. Full details of the Scheme and banking groups covered are available on the Government of Jersey’s website http://www.gov.je/dcs or on request.

Investment services offered by the Bank are not covered by an investor compensation scheme as there is currently no such scheme operating in Jersey, however ‘eligible deposits’ held pursuant to investment services may be protected under the Bank Depositors Compensation Scheme described above – for more information see the Bank’s general terms and conditions. Some of the products that the Bank might recommend to you could be registered overseas and may be covered by a local compensation scheme. Your investment counsellor will provide you with the details of any overseas compensation schemes (where applicable) at the time of making an investment recommendation.

Copies of the latest audited accounts are available upon request from the registered office.
® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.


Related articles

Global Insight 2025 Outlook: Equity balancing act

Analysis 6 minute read
- Global Insight 2025 Outlook: Equity balancing act

The “Unstoppables”

Analysis 10 minute read
- The “Unstoppables”

Global Insight 2025 Outlook: Canada

Analysis 5 minute read
- Global Insight 2025 Outlook: Canada