EU Economy: Weekly Commentary – February 02, 2026

European Market Review

Bond yields fell. Spreads narrowed. European stocks mostly rose. Brent crude surged 5.34% amid US-Iran tensions. EU measures may tighten Russian oil supply, pushing prices higher.

Last week, bond yields fell. The 10-year French-German spread continued to decline to 58.4 basis points, while the spread between the German and Italian 10-year bonds remained close to 60 basis points. European equity markets generally rose, except in Germany, where the stock market dropped 1.45%. In commodities, Brent crude oil surged 5.34% amid escalating tensions between the United States and Iran, raising concerns over potential supply disruptions in the Middle East. Additionally, the EU’s plans to ban maritime transport and insurance for Russian oil could further restrict Russian exports, tightening global supply. These combined geopolitical risks are driving oil prices higher.

Europe View Synopsis

Eurozone GDP rose 0.3% QoQ in Q4 2025, led by Germany, Italy, and Spain. Sentiment and manufacturing indicators suggest a modest 2026 recovery.

Eurozone GDP grew 0.3% QoQ in Q4 2025, slightly above expectations, supported by strong performances in Germany, Italy, and Spain, while France lagged. Italy expanded 0.3% QoQ (0.8% YoY), driven by domestic demand, especially infrastructure and machinery investment, though net exports remained a drag. Germany posted its fastest quarterly growth in three years at 0.3% QoQ, fuelled by consumption, fiscal stimulus, and early benefits from infrastructure and defence spending, despite long-term constraints from underinvestment and demographic pressures. Eurozone sentiment indicators reached three-year highs, with industrial production and business confidence signalling a modest cyclical recovery, particularly in manufacturing, while structural weaknesses and external risks persist. Consumer sentiment in Germany improved, with the GfK index rising to -24.1 and industrial orders up for three consecutive months, though Ifo expectations weakened. Looking ahead, 2026 growth is expected to be modest, supported by investment and fiscal stimulus, while gradual cooling in consumer spending and structural challenges imply that the recovery will remain uneven and cautious.

GDP

Eurozone GDP grew 0.3% QoQ in Q4 2025. Germany, Italy, and Spain led growth. Sentiment and manufacturing indicators point to a modest 2026 recovery.

Eurozone GDP held steady at 0.3% QoQ in Q4 2025, slightly above expectations, as stronger-than-anticipated growth in Germany, Italy, and Spain offset France’s sluggish performance, highlighting year-end resilience amid persistent global uncertainty and economic tensions. Italy’s GDP rose 0.3% QoQ (0.8% YoY), driven by domestic demand, particularly infrastructure-related construction and machinery investment, while net exports remained a drag, adding upside risk to the consensus 2026 growth forecast of 0.8%. Germany posted its fastest quarterly expansion in three years at 0.3% QoQ, supported by public and private consumption, fiscal stimulus, and early benefits from delayed infrastructure and defence spending, though underinvestment, demographic pressures, and global trade shifts continue to constrain long-term potential. Meanwhile, Eurozone sentiment indicators surged to three-year highs, with the European Commission’s economic sentiment index showing broad-based improvements across countries and sectors, and industrial production signalling a nascent revival that is expected to strengthen further in 2026 as defence and infrastructure spending materializes. Business confidence and labour market data point to a modest cyclical recovery, particularly in manufacturing, while structural weaknesses, competitiveness challenges, and potential external shocks pose ongoing risks, suggesting that growth in the year ahead may accelerate only gradually despite the supportive domestic backdrop.

We expect that Eurozone GDP will see modest growth in 2026 due to investment in infrastructure, machinery, and defence, as well as fiscal stimulus. However, consumer spending could cool gradually, with the restaurant sector showing early signs of slowing.

German Sentiment

Consumer sentiment in Germany improves as GfK jumps to -24.1. Industrial orders rise. Ifo index steady. Recovery remains fragile. Structural reforms and cautious government action are crucial.

Consumer sentiment in Germany is showing tentative signs of improvement, with the GfK index jumping to -24.1 in February from -26.9 in January, buoyed by rising wages and falling inflation, and the propensity to buy reaching its highest level since March 2022. Yet the broader economic picture remains fragile, as the January Ifo index held steady at 87.6, reflecting persistent uncertainty from geopolitical tensions and tariff risks. While the current assessment improved slightly, expectations weakened, underscoring the unevenness of the recovery. Encouragingly, industrial orders have now risen for three consecutive months, and planned fiscal, infrastructure, and defence spending could increasingly stimulate domestic demand, particularly as government measures aim to reduce energy costs. Nonetheless, structural challenges, from bureaucratic inertia to demographic pressures, persist, meaning that Germany’s economic rebound will require more than cyclical momentum, and the government must implement long-awaited reforms to convert a tentative upswing into a sustainable recovery. The chief domestic risk remains a swing from caution to complacency, highlighting the delicate balance facing Chancellor Friedrich Merz’s administration amid ongoing external uncertainties.

We expect Germany’s tentative recovery to strengthen as industrial orders rise and investment in infrastructure and defence ramps up. However, structural challenges and geopolitical risks mean cautious optimism, with reforms essential for sustainability.