Economic Growth Projections Revised

The European Central Bank (ECB) has lowered its growth expectations for the euro area, prompting concerns among economists. Mário Centeno, a prominent ECB policymaker and Governor of the Bank of Portugal, expressed his worries during an interview on CNBC’s “Squawk Box Europe.”

Centeno stated, “I am very concerned about the European economy.” The ECB recently adjusted its gross domestic product (GDP) projections for 2025, reducing the anticipated growth figure from 1.1% to 0.9%. The most recent data showed a modest 0.1% increase in GDP for the fourth quarter.

Investment and Export Challenges

Centeno attributed the downward revision in growth expectations to declining exports and a lack of investment. “Special investment is, I think, quite subdued in Europe,” he observed, noting that it could take up to four years for private sector investment levels to return to those seen in 2023. For housing investments, he estimated a recovery to 2022 levels might not occur until 2028.

“These are numbers that raise some questions about the recovery in Europe,” he added, indicating a cautious outlook for the region’s economic future.

Impact of Tariffs on Economic Stability

Recent tensions between the United States and its trading partners have further exacerbated concerns about Europe’s economic stability. With U.S. tariffs on imports looming, Centeno warned, “Tariffs are a tax. They are a tax on both consumption and production.” He cautioned that no one would benefit from a tariff war.

Potential Recovery through Defense Spending

On a more positive note, Centeno highlighted a possible increase in defense spending by the European Union, a response to deteriorating relations with the United States and Ukraine. If effectively implemented, these measures could provide a stimulus to the European economy. Additionally, Germany announced intentions to enhance infrastructure and defense spending, although these plans await further approval.

Prospects for Interest Rate Adjustments

Centeno provided insights into future ECB interest rate decisions, suggesting that additional rate cuts could be expected. “We do think that the journey is very clear,” he said, emphasizing that these cuts are a response to the stagnating European economy. He pointed out the ECB’s baseline projection of inflation returning to around 2% in the medium term, which would require further rate adjustments.

The ECB’s recent decision to lower its key interest rate by a quarter point to 2.5% marks the sixth cut since June of the previous year. This change was widely anticipated by market analysts.

Market Reactions and Future Speculations

Market analysts are currently evaluating the implications of the ECB’s altered language regarding monetary policy, which has shifted from “restrictive” to “meaningfully less restrictive.” This has created a divide in expectations, with some predicting a pause in rate reductions while others foresee additional cuts.

Looking ahead, it is anticipated that the decision on interest rates in April will incorporate all relevant developments, including those pertaining to tariffs and defense investments in Europe, according to Centeno.