European business outlook
When discussing economic factors, both the level and pace of change are crucial. Bankruptcies in Germany and France have reached their highest levels since around 2016. However, the 6- and 12-month pace of companies filing for relief has been the fastest this century. The overall economic picture is starting to brighten for Europe, though the recovery has not met expectations, and cyclical sectors are experiencing historically low activity levels. Real wage growth and easier monetary policy should gradually improve this situation.
The period of prosperity and lack of defaults
Business sentiment is closely tied to interest rates and the cost of financing future projects. Post-Global Financial Crisis, ultra-easy monetary policy led the ECB’s benchmark rate to drop from just over 3% to -0.5%, while the central bank's balance sheet tripled in size from 2011 to 2022. This period saw a continuous decline in bankruptcies across the Eurozone and its major economies. Fiscal and monetary support during the pandemic further accelerated this trend, with 2021 seeing the lowest number of companies filing for relief in France and Germany since 2005 and 1993, respectively.
The end of an era and shifting monetary tides
In 2022, the European Central Bank initiated its first tightening cycle in eleven years, the most aggressive in its history. By 2023, interest rates for consumer mortgages and business loans reached their highest levels since 2008, at 4.2% and 5.3%. Although rates remained constant for about a year, they have slightly decreased in 2024 with the ECB beginning its cutting cycle in June. Consequently, the pace of bankruptcies likely peaked last year, with annual growth rates of 36% in Germany and 73% in the Netherlands. However, due to the lag in monetary policy effects, the overall level of bankruptcies is expected to continue rising this year.
No complete return but some relief
Markets are expecting the ECB to cut interest rates by 125 and 175 basis points over the course of the next 12 to 24 months. It is likely that the structural issues Europe is facing will push the central bank to more aggressive easing over the medium term. Oxford Economics forecasts a return to the European neutral rate of 1.6% at the beginning of 2026. Both consumers and businesses will be positively affected by this easing of credit conditions. However, the real economy must adapt to the permanent end of the negative interest rate regime that has governed Europe for a decade.
Rates now, other issues later
Despite that, interest rates are not likely to be the most pressing topic for European businesses going into the second half of the 2020s. More than {{nofollow}}half of companies on the continent view the lack of qualified workers as their biggest problem, an issue that is more relevant for larger corporations. Regulatory hurdles as it relates to the EU’s bureaucracy, limited access to finance and unfair competition make up the other three top four concerns. These domestic hurdles are paired with global ones such as weak demand from a still recovering China and elevated energy prices and material costs. The main question going forward will be how many of Europe’s problems can be solved with an cyclical uptick of the business cycle given the structural difficulties.
Cyclical recovery but construction in doldrums
The economic outlook is expected to improve slightly in the second half of 2024 and the first half of 2025, driven by better cyclical factors. Global price pressures have eased, paving the way for real wage growth, which should support consumer spending in Europe. Sentiment in the manufacturing and construction sectors is gradually recovering, though these sectors will still feel the lingering effects of the ECB’s monetary policy the longest. German construction confidence has hit a low point but is starting to rebound, remaining near its lowest level since 2011. The extent of relief these industries experience will depend on future inflation and interest rates.
