De Guindos highlights global uncertainty and euro area financial risks

The global economy faces profound transformation and heightened uncertainty, driven by significant shifts in US policy and geopolitical risks.

These developments weigh on euro area growth by delaying investment and increasing precautionary savings.

Despite this, euro area economic activity showed resilience, growing by 0.3 percent in Q3 2025, mainly due to stronger consumption and investment, particularly in the services sector.

The labor market remains robust, with unemployment near historical lows.

Inflation stood at 2.0 percent in December, with core inflation also falling slightly.

While strong wage growth continues to push up underlying inflation, forward-looking indicators suggest an easing in the coming quarters, with inflation expected to stabilize at the 2 percent target in the medium term.

Economic growth projections have been revised up to above 1 percent this year, rising to 1.4 percent in subsequent years, primarily driven by domestic demand, business investment, and government spending on infrastructure and defense.

The euro area, as an open economy, remains exposed to external shocks and vulnerabilities from geopolitical and trade developments, including China's rising competitiveness in key export sectors.

Despite this, current market pricing does not appear to reflect the high global uncertainty.

Negative surprises, such as re-escalating trade tensions, setbacks in AI advances, or intensifying doubts regarding US fiscal credibility, could trigger abrupt shifts in market sentiment.

Geopolitical risks noticeably raise downside risks to growth, particularly for trade-reliant countries or those with high public debt.

Inflation dynamics could be affected in various directions, either lower due to reduced demand or higher from fragmented supply chains and import prices.

On the financial side, heightened uncertainty could lead to higher risk premia, tighter lending conditions, and weaker loan growth, even as safe-haven flows into gold signal high geopolitical risk.