Economic Outlook

Growth will be supported by consumption as real incomes rise, resulting from falling inflation. Political uncertainty and global economic risks continue to affect the European outlook.

Key Takeaways

1. Real wages will be bolstered by falling inflation, which should allow for further rate cuts. International political uncertainty poses a threat to inflation expectations and could slow the pace of rate cuts. Our view on real estate yield compression is heavily dependent on the path of interest rates.
2. Consumers will have greater spending power due to lower inflation, which will support growth across Europe. Reduced global trade, which may occur for a multitude of reasons, is a key risk to our growth projections. Lower domestic demand and weakening business sentiment are also risks to occupational demand.
3. With low unemployment and rising real wages, spending will be supportive of economic growth. However, tight labour markets may inhibit the expansion, requiring longer-term supply-side reforms to improve trend growth possibilities around Europe. Office-based jobs growth continues to be a main pillar of office and residential demand

Lower inflation and interest rates to drive economic growth

Inflation around target, wage growth and cheaper credit to drive consumption

Falling energy costs and weaker goods price rises allowed headline inflation to fall rapidly through 2023 and 2024. We see this trend continuing in 2025, pushing inflation closer to the European Central Bank’s (ECB) and the Bank of England’s (BoE) 2% target. Volatility in some prices is anticipated, mostly in commodities, and energy prices will remain a key focus. Central banks persistently reiterate their stance on being watchful around short-term data flows. CBRE’s central view is conditioned on inflation returning to target, which is a key factor for growth.

Core inflation, which excludes food and energy, has been slower to fall than headline inflation. High service sector inflation, mostly via labour costs, has kept core inflation higher than the headline rate, but as labour costs moderate and financing conditions loosen up over 2025, both measures of inflation should ease. However, the UK is an exception, as recent policy changes may increase prices as labour costs rise.

Lower rates good for consumers, business and real estate

2024 saw central banks cutting policy rates. The ECB deposit rate ended 2024 at 3.0% and the BoE rate at 4.75%. In both cases we expect around 100bps of cuts during 2025 – possibly more in Europe. Long-term interest rates have followed short rates down – not as rapidly – but they will likely fall further. Interest rates are not expected to reach their pre-pandemic lows.

Figure 1: CPI inflation and ten-year government bond yield, Western Europe

Figure 2: GDP (%p.a.) and consumption (%p.a.) forecast

Growth to rebound in 2025

Consumer spending will be the chief driver of GDP growth in most European economies (see Figure 2). The resilient labour market and improved consumer confidence will also contribute to anticipated increased demand.  

Euro Area economic growth is expected to improve to 1.5% in 2025, after sub-par growth of 0.8% in 2024. Across Western Europe, some of the stronger growth in 2025 will be in the UK (1.8%), Denmark (2.1%), and Spain (2.6%). In Central Europe, Poland (3.4%), and Hungary (2.3%) are expected to perform well. The German economy is forecast to see improved but still modest growth of 0.8%

Exports should pick up as business activity improves on lower energy and interest rate costs.

Labour market tightness: Positive for demand but a challenge for business expansion

Across most European countries, job creation surprised to the upside in 2024, but we expect a moderation in 2025. Major cities generally grow more than countries and the service sector contributes to this outcome. Recent survey data have shown modest signs of improvement in services, but there is a continued weakening in manufacturing.

Businesses may find their growth plans curtailed by labour market tightness and so begin to consider longer-term plans to achieve more output with less input. Reduced business activity due to a tight labour market and potentially resurgent inflation are among the things that could make policymakers hesitant to ease interest rates much further.

Growth remains sensitive to international developments

Rising global uncertainty keeps downside risks high

CBRE’s central case is accompanied by a downside and upside view on the economy. This section provides an overview of our scenarios and other risks.

CBRE’s downside: A weaker labour market hitting consumer sentiment and an associated fall in aggregate demand triggering a business cycle recession (Figure 3). This is not a “trade war” scenario, but changes in trade policies would reduce European export levels and potentially impact wider business sentiment. Any effect on export growth and industrial production would be delayed to 2026 as the policies take time to filter through. 

CBRE’s upside: A short-term boost to economic growth caused by either improved business investment and a more confident consumer, or an increase in public spending due to new governments. This would put upward pressure on wages and inflation, which revert to our central case, described above, in the long-term.

An additional risk in all scenarios comes from political uncertainty in some of the large European economies. The political uncertainty in Germany and France, on top of the new U.S. Government’s possible trade policies, create a risk to growth in 2025, if they were to dampen consumer and business sentiment and spending. However, a change to the German debt ceiling could help alleviate some of these concerns in the face of increased government spending.

Geopolitical uncertainty remains a risk as an escalation of the conflict in the Near East or the continuing of the conflict in Ukraine could threaten higher commodity prices or further risk unsettling business and consumer sentiment.

Figure 3: GDP growth scenarios, Western Europe including UK (% p.a.)