Hopes for euro zone, Germany growth rising even before debt deal news

By Indradip Ghosh

BENGALURU -Optimism was already building among economists on German and euro zone growth in a Reuters poll taken just before key political parties in Germany agreed a historic deal on debt, suggesting bigger revisions to forecasts in coming days.

Chancellor-in-waiting Friedrich Merz reached an agreement with the Greens on Friday on a plan to dramatically increase state borrowing to fund defence and infrastructure investment, fuelling hopes for a turnaround in Europe's economic fortunes.

The proposals by Merz's conservatives and the Social Democrats mark one of the biggest political changes in Germany since the fall of the Berlin Wall in 1989.

Even before Friday's news, economists in the March 10-14 Reuters poll broke a long spell of downgrades to 2025 euro zone growth predictions, leaving the forecast steady at 0.9%. They also upgraded the 2026 growth view for the first time in nearly a year, to 1.3% from 1.2% seen last month.

German economic growth was expected to expand 0.2% this year and pick up to 1.1% next year, compared with 1.0% expected in a January survey.

Those forecasts are now likely to mark a line in the sand, although most respondents said they were wary of over-optimism until it became clear that change was really coming. 

"It is now more or less a given that we're going to get the deal, and when we talked two days ago there was still a big chance of failure," said Carsten Brzeski, global head of macro at ING, who expects German growth to pick up in the second half of the year. 

"I would expect an additional maybe 0.5pp of growth in Germany this year. For the euro zone, it would mean small upward revisions of 0.1pp to 0.2pp."

Several economists had already made more substantial upgrades to their 2026 growth forecasts.

But most say an escalating trade war led by U.S. President Donald Trump, and his constant flip-flops on tariffs, still pose a considerable risk to the growth outlook.

Fabio Balboni, senior European economist at HSBC, said "the potential for fiscal support to have a meaningful impact on near-term growth is relatively limited, while the potential for tariffs to hurt growth is very large."

Trump on Thursday threatened to slap a 200% tariff on European wine and spirits after the European Union said it would levy tariffs on American goods next month. That in turn was a reaction to Trump's 25% tariffs on steel and aluminum imports, which took effect on Wednesday. 

ECB IN DIFFICULT SPOT

All of that complicates the outlook for the European Central Bank, which cut its key deposit rate for the sixth time since June to 2.50% last week.

ECB President Christine Lagarde declined to repeat her past guidance that the downward direction of rates was clear and warned of "phenomenal uncertainty". 

Inflation will remain above the ECB's 2% target at least until 2026, poll medians showed. 

Nearly 55% of economists, 40 of 73, expected only two more 25 basis point reductions this year - most likely in April and then another sometime in Q3, compared to back-to-back rate cuts until at least July predicted last month.   

Nearly 40% of economists, 23 of 62, expected the ECB to pause in April.

"I would say April is pretty much up in the air and reasons for a pause have actually grown quite a bit," said Bas van Geffen, senior macro strategist at Rabobank.

"If the economy stays strong and inflation stays higher than expected, because of tariffs and this new fiscal stimulus, there is a risk the window for cuts is already closing."

(Other stories from the Reuters global economic poll) 

(Reporting by Indradip Ghosh, Polling by Renusri K and Aman Kumar Soni; Editing by Ross Finley, Hari Kishan and Catherine Evans)