EU Economy: Weekly Commentary – June 30, 2025

European Market Review

European bonds fell, except Italy. Concerns persist over Italian debt. Stocks rose, led by Germany. Euro strengthened. Oil dropped sharply on supply growth and easing tensions.

European bond markets had a mixed week. Most bonds declined, except in Italy, where yields fell by 1.72 basis points. However, Italy’s debt situation remains concerning. The primary deficit has narrowed in 2025, but the total deficit has barely improved. Persistently high interest payments are to blame. Past ECB interventions helped keep Italian yields artificially low, masking this imbalance. Meanwhile, the Franco-German 10-year spread narrowed to 68.2 basis points. European stock markets rallied. Germany led with a weekly gain of nearly 3%. The euro strengthened by 1.72% against the US dollar. In contrast, Brent crude prices fell sharply, dropping 14.20%. The decline was driven by rising supply, easing geopolitical tensions, and cautious sentiment. OPEC’s plan to raise output by 411,000 barrels per day in July helped ease supply concerns. Perceived stability in the Israel-Iran conflict also reduced risks around the Strait of Hormuz. A larger-than-expected draw in U.S. oil inventories offered limited support.

Europe View Synopsis

Eurozone stagnated in June with easing inflation; Germany led growth and business confidence, while consumer sentiment remained weak amid geopolitical and economic uncertainties.

In June, the Eurozone economy remained stagnant, with the Composite PMI holding at 50.2, signalling only marginal growth for the sixth consecutive month amid persistent challenges. Manufacturing continued to drive expansion but at a slower pace, while services stabilised after a slight decline in May. New orders nearly stabilised, with manufacturing orders ending a three-year decline. Business confidence reached its highest level since January, and employment rose modestly, mainly in services. Inflation pressures eased overall, yet geopolitical tensions, particularly in the Middle East, pose risks through rising energy costs and supply chain disruptions. Germany outperformed with a composite PMI of 50.4, supported by stronger manufacturing and lower interest rates, whereas France’s output continued to contract. German business confidence improved significantly due to political stability and investment plans, reflected in rising business sentiment; however, consumer confidence remains cautious amid inflation, labour market concerns, and limited fiscal support. Overall, Eurozone growth risks remain elevated amid subdued momentum.

Business Activity

The Eurozone economy stagnated in June, with Germany outperforming due to stronger manufacturing, while services stabilised, inflation eased, but geopolitical risks and uncertainty weigh on growth prospects.

The Eurozone economy showed continued stagnation in June, with the HCOB Flash Composite PMI steady at 50.2, indicating only marginal growth for the sixth consecutive month amid ongoing economic challenges. Manufacturing remained the primary driver of output expansion, although the pace slowed to a three-month low, while services activity stabilised following a slight contraction in May. New orders approached stabilisation, declining at the slowest rate in over a year, and manufacturing new orders ended a prolonged contraction that lasted more than three years. Business confidence improved to its highest level since January, and employment increased modestly, driven primarily by hiring in the services sector, even as manufacturing jobs continued to decline. Inflationary pressures eased overall, with input cost inflation at its weakest since last November; however, services firms raised their selling prices at an accelerated pace, while manufacturers continued to cut output prices. Geopolitical tensions, particularly the conflict in the Middle East, pose renewed risks to the Eurozone economy through rising energy prices and potential supply chain disruptions. Delivery times lengthened slightly but remain manageable, suggesting resilience despite uncertainty. Germany emerged as a relative outperformer within the region, with its composite PMI rising sharply to 50.4 from 48.5, signalling a return to growth driven by a notable improvement in manufacturing—the sector recorded its strongest reading since 2022 at 49—buoyed by falling interest rates and a rebound in export orders. In contrast, France extended its output decline for the tenth consecutive month, while growth in the rest of the euro area slowed to the weakest pace since late 2024. Overall, despite pockets of strength, the Eurozone’s subdued momentum and heightened uncertainties suggest that second-quarter growth is unlikely to match the modest gains observed in the first quarter.

We expect the Eurozone economy to face continued stagnation in the short term, with growth risks heightened by geopolitical tensions, despite Germany’s manufacturing resilience and easing inflationary pressures.

German Sentiment

Business optimism grows in Germany amid political stability and investment plans, but consumer confidence lags due to inflation, labour market worries, and limited household-targeted fiscal support.

German consumer confidence remains notably fragile, with the GfK consumer climate index dipping slightly to -20.3 in June. While business sentiment has picked up steadily since the beginning of the year, households remain cautious. Inflation concerns, stagnant real wage growth, and a deteriorating labour market continue to weigh on sentiment. Although there was a modest rebound in private consumption in the first quarter, overall spending has not yet recovered to pre-energy-crisis levels. Consumers appear to be acting rationally in response to economic conditions, as most government stimulus measures to date have been directed toward businesses and infrastructure investment rather than offering direct support to households. Until there is a marked improvement in employment prospects and purchasing power, a broad-based recovery in consumer spending remains unlikely.

Business confidence, by contrast, has gained significant momentum, with the Ifo Business Climate Index rising to 88.4 in June—its highest level in nearly a year—and expectations improving to 90.7, the strongest reading in over two years. This upswing reflects optimism that the new government under Chancellor Friedrich Merz will provide a more stable policy environment and unlock fiscal space for targeted investments. While actual economic policy initiatives remain in line with the original coalition agreement and no major new reforms have been introduced, the return to political stability and the absence of disruptive policy shifts have positively influenced corporate sentiment. Nonetheless, structural challenges persist. External risks—including the threat of US tariffs, a stronger euro, higher energy prices, and intensifying geopolitical tensions—continue to pose headwinds and may ultimately test the durability of the current wave of optimism.

We expect German business confidence to remain on an upward trajectory, while consumer sentiment will recover more gradually, pending improvements in real wages and labour market conditions.