The outlook for nonfinancial companies in Europe, the Middle East and Africa (EMEA) for 2025 is stable. This is a change from our 2024 outlook, which was negative. Receding inflation, easing monetary policy and a moderate pickup in growth set the stage for slightly improved credit conditions in 2025. But geopolitical risks, uncertainty about trade policy from the incoming Trump administration in the US, structurally high energy costs and cautious consumer sentiment continue to weigh on prospects.
» Interest rate cuts will lower refinancing costs, although rates are still relatively high. Central banks across the region began to cut rates in 2024 and we expect further cuts in 2025. This will benefit companies that have refinanced at higher rates since 2022, freeing up cash flow for potential investments and create friendlier conditions for speculative-grade companies. Those that still benefit from pre-2022 rates, however, will still face higher refinancing costs. Lower rates will also support consumers exposed to floating-rate debt and valuations in Europe's real estate sector.
» While the recovery across sectors and end markets will be uneven, we see pockets of positive momentum. They include defence, which will be boosted by geopolitics and higher spending; pharmaceuticals, which will benefit from continued high demand for weight-loss and diabetes drugs; and companies exposed to the growth in data centres, including manufacturers. We expect stronger economic and operating conditions to support issuers in the Gulf Cooperation Council (GCC) countries and Sub-Saharan Africa.
» Other sectors face greater challenges as Europe struggles with competitiveness. Europe's automobile industry is struggling with underutilised production capacity and the transition towards electric vehicles. Industries such as chemicals are still hamstrung by structurally high energy and feedstock prices as well as cheap imports from China.
» What would change the outlook. Key factors for a negative outlook include: stagflation or growth well below the potential growth rate of 1.5%; heightened geopolitical risks; severe negative impact from changing trade conditions; global default rates increasing above the long-term average of 4.2%. Key factors for a positive outlook include: economic growth well above the potential rate of around 1.5%; further moderation
of interest rates; earnings growth across many sectors; energy scarcity is addressed; geopolitical related risks recede; and default rates remain low.
Outlook stable: recovery is underway with growth in 2025 to pick up
The outlook for nonfinancial companies in EMEA for 2025 is stable. This is a change from our 2024 outlook, which was negative. Receding inflation, easing monetary policy and a moderate pickup in growth set the stage for slightly improved credit conditions in 2025. But geopolitical risks such as the continuing Russia-Ukraine war and conflicts in the Middle East, uncertainty with regards to trade policy from the incoming Trump administration in the US, structurally high energy costs and cautious consumer sentiment continue to weigh on prospects for many companies in EMEA.
We expect growth to accelerate in 2025 to 1.2% in the euro area and 1.8% in the UK as domestic demand gains traction amid easing financial conditions and improving real wages, supporting demand for products and services (Exhibit 1). Further, we expect growth to pick up to 4.7% in Saudi Arabia, supported by strong non-oil growth and government spending on project implementation, and 1.7% in South Africa where energy availability, while improving, remains a constraint.
Geopolitical risks pose a risk to our stable outlook. An escalation of armed conflicts in Ukraine and across parts of the Middle East as well as tensions between Israel and Iran could further impair growth and confidence in the Middle East and Europe. The second Trump administration could affect global credit and economic dynamics through changes in US foreign and trade policies. The proposed blanket tariffs and US-China tensions will likely hurt trading partners in the region, but could indirectly benefit Europe by making it a more attractive investment destination because of its relative policy stability.
Key factors for a negative outlook include: stagflation or growth well below the potential growth rate of 1.5%; heightened geopolitical risks; severe negative impact from changing trade conditions; global default rates increasing above the long-term average of 4.2% from 4.6% in October 2024. Key factors for a positive outlook include: economic growth well above the potential rate of around 1.5%; further moderation of interest rates; earnings growth across many sectors; energy scarcity is addressed; geopolitical related risks recede; and default rates remain low.
For a breakdown of companies that we rate in EMEA, please see the Appendix. We have also published outlooks for nonfinancial companies in North America, Latin America, Asia-Pacific excluding China and China.
Lower rates will benefit floating-rate borrowers and levered companies seeking repricings
Many central banks across Europe and the Middle East began cutting rates in 2024 and we expect more rate cuts in 2025 (Exhibit 2). Most prominent were cuts by the European Central Bank and the US Federal Reserve, each totalling 75 basis points, over the course of the second half of 2024. Many central banks in countries of the Gulf Corporation Council (GCC) have their currencies pegged to the US dollar and sync their interest rates with those of the Fed. Companies have taken advantage in 2024 of the opportunity to refinance debt, but with rates now lower we expect more repricings to occur in 2025. However, companies that raised debt before central banks raised rates in 2022 and 2023 still benefit from low-cost debt that, if refinanced today, would still be more expensive than before the rate-hike cycle.
For speculative-grade companies in EMEA, we expect borrower-friendly market conditions as rates decline. However, many low-rated issuers still need to refinance and there remains a high concentration of companies rated B3 negative or below. Credit quality for new issuers is likely to be more robust than pre-pandemic, but geopolitical risks could disrupt access to financial markets.
Lower rates will also be a boon for consumers who have been struggling over the past two years with diminishing purchasing power in light of high inflation. Consumers that have short-dated interest rate exposure — such as to consumer and auto loans and, particularly in the UK and Sweden, mortgages with variable rates — will also benefit from lower funding costs. Consumer sentiment in the EU has also much improved from its cyclical trough in September 2022 and in September 2024 was close to the long-term average.
Falling interest rates are also key to the prospects of Europe's real estate sector and should support valuations. But the operating performance of the real estate sector continues to differ materially across asset types and countries. Given the economic recovery underway in Europe, we expect broadly stable occupancy rates and rental growth that continues to benefit from being linked to inflation, though this growth will begin to level off. Noncyclical, structurally favoured asset classes, such as multifamily residential
and logistics, will outperform office, where secular shifts have reduced absolute demand and increased interest in high-quality, environmentally-friendly properties in prime locations, at the expense of secondary properties in non-prime locations. These shifts may lead some companies to struggle in refinancing debt raised against lower-quality assets. However, the office sector in Europe is under less pressure than in the US, with a structurally lower vacancy rate of around 9% as of the first half of 2024, although vacancy rates vary widely across countries and submarkets. The UK is best placed for a recovery in values. While lower rates are improving financing conditions, Sweden's real estate companies generally have short-dated debt maturities; Fastpartner AB (B1 stable) stands out because it only hedges a low portion of its short-dated debt.
Defence and pharmaceuticals among sectors set to benefit in Europe
While the economic backdrop has improved and financial conditions have eased, supporting prospects for most companies, the recovery across corporate sectors and markets in EMEA will still be uneven. However we see some industries that have positive momentum: In Europe, defence and pharmaceuticals, in particular, benefit from secular supports that will continue beyond 2025.
Europe's defence sector continues to benefit from structural demand drivers that are unlikely to abate in the next years. Order books are strong and cover between two and five years of revenues. Many European countries are members of NATO and remain committed to higher defence spending to align with NATO's target level of 2% of GDP, although any reduced US support for Ukraine might increase these governments' fiscal burdens. Geopolitical tensions, such as the ongoing war in Ukraine and conflicts in the Middle East, support continued rising demand that benefits companies such as Rheinmetall AG (Baa2 stable), Airbus SE (A2 positive) and Leonardo S.p.A. (Baa3 stable). The main risk to our double-digit percentage operating profit growth forecast for 2025 is global supply chain challenges that the aerospace and defence sector is grappling with.
Overall demand for pharmaceutical products is noncyclical. However, demand for weight-loss and diabetes drugs have turned these products into blockbusters, a benefit to Novo Nordisk A/S (A1 positive). The high demand for GLP-1 weight-loss drugs affects multiple industries and companies ranging from active pharmaceutical ingredients producers such as Fabbrica Italiana Sintetici S.p.A. (B3 stable), to packaging and packaging equipment manufacturers such as Platin2025 Acquisition S.a r.l. (Syntegon, B2 negative). Investments into production facilities that often run into billions of euros also provide a fillip to local economies.
Other therapeutic categories such as oncology and immunology will contribute to strong growth. The use of immuno-oncology blockbuster drugs like AstraZeneca PLC's (A2 positive) Imfinzi will expand to treat earlier-stage cancers and more combination regimens. Other innovative areas in oncology, such as antibody drug conjugates, will also drive rising sales. Rising diagnosis and treatment of immunological conditions, recent and pending approvals of new medicines and expanding uses of existing immunology drugs will also support earnings growth.
Elsewhere, many major European telecommunications companies are winding down from the peak of their 5G investment cycle, which allows them to reallocate freed up liquidity. Furthermore, we believe that technologies such as 5G, fibre to the home, generative AI and edge computing will increasingly combine to deliver new opportunities for telecoms operators.
But the European telecom sector remains highly fragmented, with numerous small and medium-sized operators competing in national markets, leading to inefficiencies and lack of scale. As a result, European operators have struggled to keep pace with their counterparts in the US and Asia, where larger companies dominate the market. There could however be a reappraisal of market consolidation in Europe in 2025, particularly after the recent appointment of a new EU competition commissioner, Teresa Ribera, who has outlined a need for European companies to scale up to compete globally.
Data centre operators are continuing their expansion, which bodes well for future equipment demand growth in 2025 and well beyond. We expect data centre capacity to double in the next five years to support surging computing demand for cloud services, artificial intelligence and cryptocurrencies. European manufacturers such as Schneider Electric SE (A3 positive), Siemens Aktiengesellschaft (Aa3 stable) and ABB Ltd (A2 stable) will benefit through their exposure to low and medium voltage power distribution products; backup power systems; heating, ventilation, air conditioning and cooling systems, security systems and building automation.
IT services companies will also benefit from continued advances in technology. We are forecasting further organic revenue growth for European service providers because their customers will continue to increase digitalisation to sustain their own competitive positions. Digital transformation and the necessary technologies are too fast-moving and complex to be adopted successfully without specialist advice, and are difficult and costly for clients to replicate in-house.
Operating conditions to support companies in GCC, Turkiye, Sub-Saharan Africa
Outside Europe, we expect companies in the GCC region to benefit from solid demand, declining interest rates that support consumption, favourable economic policies and ongoing investments in infrastructure and technology-based projects. Telecoms companies are supported by non-oil macroeconomic growth and regional governments' ambitions for digitalisation and modern technologies. Utilities continue to maintain a strong market position and benefit from stable and transparent regulatory frameworks, with a focus on expanding the contribution of renewables to their overall energy mix. We expect the housing market to be supported by strong demand, constrained property supply in 2025 and elevated house prices. Operating conditions for GCC national oil and gas companies benefit from resilient industry conditions and robust business profiles, with low-cost production mitigating increased volatility and potential moderation in oil prices.
In Turkiye, the return to more orthodox policies and gradual removal of distortionary macroprudential measures support operating conditions for Turkish companies. However, sustained real exchange rate appreciation could hit Turkish exporters' competitiveness. Interest rate increases during 2023 and 2024 are stabilising local credit growth and contributing to a softening of domestic demand.
Across Sub-Saharan Africa, prospects are better for 2025 after a difficult 2022-2024, driven by expectations of slower depreciation of local currencies and anticipated expected rate cuts. This supports the operating environment for telecommunications as well
as real estate and construction-related industries. In Nigeria, the naira's depreciation is likely to slow, although high inflation will curtail domestic demand as consumers' purchasing power reduces. In South Africa, the operating environment is set to improve; we expect retailers focused on budget-conscious consumers to stabilise and grow above the inflation rate, while commercial real estate will remain under pressure because of excess supply. Gold miners will benefit from high gold prices, and the platinum group metals segment may see a gradual improvement in pricing as miners close unprofitable operations and postpone investments, and metal stocks deplete.
As Europe's competitiveness lags, autos and chemical companies grapple with structural issues
Other sectors face less favourable conditions, in particular related to the competitiveness of key industries in Europe, which has
been falling behind those of the US (Aaa negative) and China (A1 negative). Former European Central Bank President Mario Draghi in September 2024 presented a series of recommendations on how to improve competitiveness. The report called for a more joined- up industrial and trade strategy for Europe as well as extra annual investment of around €750 billion-€800 billion, or 4.4%-4.7% of EU GDP. The investment would support the growth of clean technologies and defence, and remedy long-standing underinvestment in digital tech, which Draghi said was largely responsible for Europe's low productivity. It is now upon the EU Commission to adopt and then implement recommendations from the report.
The automotive sector is among those facing these competitive pressures. Europe's entire auto chain is grappling with an uneven transition towards electric vehicles, aggressive competition from Chinese manufacturers with leaner cost structures and sluggish demand in the region. Sales in Western Europe remain well below their levels before the pandemic, resulting in underused production facilities locally. Weakening demand in China, an important profit contributor for German automakers, adds to the pressure. In October, we changed the outlook for the global automotive sector to negative from stable on weaker sales and significant margin contraction as less demand and more competition pushed prices lower.
Among European automakers, Volkswagen Aktiengesellschaft (A3 negative) has announced plans to step up restructuring initiatives in the region. In 2025, we expect only moderate volume growth and continued price pressure, constraining margins of European automakers. As a result, we expect restructuring initiatives to intensify. This will affect the entire value chain including not only auto suppliers, but also manufacturing and service companies with exposure to the automobile sector.
Elsewhere, Europe's chemical industry faces structural headwinds from higher costs, including power and feedstock. This puts European producers at a competitive disadvantage against commodity chemical producers from the Middle East, many of whom, like Saudi Basic Industries Corporation (A1 positive), benefit from advantageous feedstock agreements, and China, whose producers have increased exports amid a slow recovery in the domestic economy. The period of protracted destocking that took place in 2023 and well into 2024 is over, but to improve profitability significantly, Europe's chemical sector needs a cyclical recovery to improve capacity utilisation and for global excess supply to clear. By contrast, we expect GCC petrochemical industry conditions to improve slowly in 2025 after the downturn in 2022-23, benefiting from generally low-cost and efficient operations.
Another pinch point is labour costs, which are affecting a range of industries including airlines. While pressure on operating profitability is greatest on US airlines compared with before the pandemic, European airlines are dealing with labour cost growth that is higher than historical levels and that we project will result in a decline in operating margin by 150 basis points between 2023 and 2025. Operating margins of European carriers will still exceed pre-pandemic levels. But climate charges are also higher for European airlines and these will continue to increase. Further, credits for the European Emissions Trading Scheme will decline toward zero by the end of 2026. Applicability of these charges expanded to flights beyond the European Economic Area starting in 2023. European airlines will face annual increases in costs for carbon emissions.
www.moodys.com
