Cyprus is included among Fitch’s balance of Positive Outlooks in its latest Non-Rating Action Commentary on Western European sovereigns issued on Monday, 25 November, with overall fiscal performance expected to remain highly heterogenous.

According to the rating agency, the neutral outlook on Western European sovereigns reflects an expectation of moderate growth, underpinned by a strong labour market and lower interest rates, with Fitch Ratings noting however that challenges to growth, including from potential trade restrictions, will make fiscal policy adjustments harder, particularly among more highly indebted countries.

It is noted that the growth outlook for Western Europe in 2025 hinges on a projected recovery in consumption and investment, with consumer demand expected to increase as households spend their above-average savings, while more rapid absorption of NextGenerationEU (NGEU) funds and lower interest rates should support stronger public and private investment.

It is added that the region’s recovery could be derailed by persistent uncertainty, demographic challenges, or the onset of higher trade and non-trade barriers following the US elections, as higher effective tariff rates would have a heterogenous impact on the region, with Germany being most at risk among large economies.

Fitch expects inflation to continue to decline, with core inflation remaining above the headline rate in part due to ongoing pressure in the services sectors, with ECB monetary normalisation by the ECB – as well as the region’s other central banks – also expected to continue in 2025.

It is added that fiscal positions improved only modestly in 2024, a trend they expect to continue in 2025. Sovereigns in the region will need to balance ongoing expenditure demands (such as on additional defence) with the need to rein in deficits that remain well above pre-pandemic levels in many countries, it is added.

Fiscal performance will remain highly heterogenous, continues the agency, noting the maintenance of Positive Outlooks on Cyprus (BBB+), Italy (BBB), Portugal (A-), Spain (A-) and San Marino (BB) as a reflection of continued progress in reducing long-standing macro and external imbalances and improvement in fiscal metrics in some countries.

By contrast Belgium (AA-), Finland (AA+) and France (AA-) are on Negative Outlook due to deterioration in fiscal positions, challenging debt dynamics, and uncertainty around policy direction, the commentary concludes.