EU Economy: Weekly Commentary – October 06, 2025

European Market Review

European bond yields surged amid debt and inflation concerns. Stocks rose and the euro strengthened. Brent crude fell on higher supply, weaker demand, and OPEC+ plans.

Bond yields fell. European long-term government bond yields surged to their highest levels in over a decade, reflecting mounting debt concerns, persistent inflation, stronger-than-expected price data, and expansive government spending plans, while expectations of the ECB maintaining steady rates added to market uncertainty. Germany’s 30-year yield reached a 14-year high, and 30-year French government bond yields climbed for a fourth consecutive month, approaching multi-year highs amid growing fiscal apprehensions. European equities closed higher, led by Germany and Italy, each rising nearly 2.7%. The euro appreciated 0.35% against the US dollar. Brent crude fell 6.48%, pressured by expectations of increased supply and softer demand: OPEC+ is poised to raise production in November, with Saudi Arabia advocating a significant increase and Russia a more moderate one, while the long-delayed Iraqi pipeline to Turkey resumed flows. Concurrently, US crude inventories expanded, refinery activity slowed, and seasonal demand weakened, reinforcing the bearish sentiment in oil markets.

Europe View Synopsis

Eurozone growth remained modest in September, led by services in Germany and Spain. Inflation eased slightly, unemployment rose to 6.3%, and business sentiment showed cautious optimism.

Eurozone inflation rose to 2.2% in September from 2.0%, driven by higher services costs and a smaller drag from energy, while core inflation held at 2.3%. The increase largely reflects temporary base effects, with falling energy prices, a stronger euro, and moderating wage growth expected to ease pressures in the coming months. National disparities persisted, with German inflation rising to 2.4% and Italian inflation stable at 1.6%. The ECB is expected to maintain rates as medium-term inflation remains contained. Labour market conditions remained resilient despite unemployment edging up to 6.3% in August, though hiring expectations softened, particularly in services, and regional differences persisted, with stronger job growth in southern economies versus slower northern gains. Business activity expanded modestly, with the Composite PMI rising to 51.2, led by services in Germany and Spain, while France contracted. Employment fell slightly, new export orders declined, and inflationary pressures eased. Overall, cautious optimism prevailed, supported by rising consumer confidence and improved forward expectations, though subdued output, employment, and price forecasts highlight ongoing economic risks.

Inflation

Eurozone inflation rose to 2.2% in September from 2.0%, driven by energy and services; core held at 2.3%. ECB expected to keep rates, inflation remains contained.

Eurozone inflation accelerated to 2.2% in September from 2.0% in August, driven mainly by higher services costs and a reduced drag from energy, while core inflation, excluding food and energy, held steady at 2.3% in line with expectations. The increase is largely attributed to temporary base effects, with energy inflation narrowing from -2.0% to -0.4%, a trend expected to fade as falling energy prices, a stronger euro and moderating wage growth exert renewed downward pressure on consumer prices. Core inflation is projected to ease only gradually, as corporate pricing intentions in both manufacturing and services remain subdued, indicating limited underlying momentum. Against this backdrop, the ECB is expected to keep rates on hold, with markets assigning little probability to further cuts and instead pricing inflation to slip slightly below the 2% target in 2025. Policymakers remain split between concerns about persistent undershooting and confidence in resilience supported by solid employment, a rebound in industry and higher defence spending. National data reflect this divergence, with German inflation rising to 2.4%, its highest since spring, while Italian inflation remained stable at 1.6%, pointing to weak consumption and restrained pricing power. Overall, the figures suggest that the recent uptick in Eurozone inflation is temporary, reinforcing expectations that the ECB will maintain its current stance as inflation remains contained and the medium-term outlook points to price growth stabilising around, and potentially below, target.

We expect that moderating wage growth, a stronger euro, and weak consumer sentiment will keep inflation pressures contained, leading the ECB to hold rates at least until its final meeting of the year.

Labour Market

Eurozone unemployment rose slightly to 6.3% in August, remaining near historic lows. Weakened hiring expectations and regional disparities highlight a cautious yet resilient labour market.

Eurozone unemployment edged up to 6.3% in August, rising from 6.2% in July, as the number of unemployed increased by 11,000, though still remaining 136,000 lower than in June. While any rise in unemployment warrants attention, the labour market continues to demonstrate resilience, remaining near historic lows despite slow economic growth and ongoing uncertainty. Employment expectations, however, have steadily softened in recent years, with the European Commission’s Employment Expectations Index falling in September to its lowest level since 2021. Manufacturing firms are showing a modest improvement in hiring intentions, but the service sector experienced a notable decline in job prospects last month. Rising wages have led businesses to prioritise productivity gains, adding pressure to hiring trends. The Eurozone labour market also displays regional disparities: southern countries are seeing stronger private-sector job growth and more structural declines in unemployment, while slower growth in the north is contributing to upward pressure on joblessness. Overall, despite localised weaknesses and tempered hiring expectations, the Eurozone labour market remains broadly robust, supported by historically low unemployment and ongoing, if cautious, employment activity.

We expect the Eurozone labour market to remain resilient despite a slight rise in unemployment, though weaker hiring expectations and regional disparities suggest cautious, uneven job growth ahead.

Business Activity

Eurozone growth remained modest in September, with PMI at 51.2. Services drove expansion, led by Germany and Spain, while France contracted. Employment fell slightly and inflation eased.

The Eurozone economy sustained a modest expansion in September, with the Composite PMI rising slightly from 51.0 to 51.2, marking a 16-month high. Growth was led by the services sector, where the Business Activity Index climbed to 51.3, an eight-month high, reflecting the quickest expansion in output and new orders since May 2024. Germany was the main driver of growth, recording moderate expansion, while Spain posted the strongest increase in private sector activity across the major Eurozone economies. Ireland and Italy saw moderate growth, whereas France remained the outlier, with output contracting at a faster pace than in August, weighed down by political uncertainty and softer demand. Overall new business improved only modestly, while new export orders continued their three-and-a-half-year decline. Output growth exceeded new business, reducing backlogs of work at the fastest rate in three months. Employment fell slightly for the first time since February, while inflationary pressures eased, with input costs and output charges rising at the slowest rates in several months. Business optimism strengthened to its second-highest level since July 2024, indicating cautious confidence in growth prospects over the coming year.

We expect eurozone growth to remain modest. Services support activity, but a stronger euro may weigh on exports and manufacturing, while easing input costs help contain inflation.

Business Sentiment

Eurozone business sentiment shows cautious optimism as consumer confidence rises and expectations improve, despite weak output, employment, and price forecasts, reflecting resilience amid ongoing economic risks.

Eurozone businesses are showing cautious optimism as uncertainty eases and major trade shocks have been avoided. The European Commission’s economic sentiment index rose slightly to 95.5 in September from 95.3, reflecting a modest return of confidence about the future. While manufacturing and services sectors reported slightly weaker assessments of recent output, their expectations for the coming months improved. Consumer confidence ticked up by 0.6 points to -14.9, although it remains low by historical standards. Sub-indices show a mixed picture: industrial confidence fell marginally to -10.3, services confidence dropped to 3.6, and retail trade confidence slid to a three-month low of -7.7, while confidence among contractors remained broadly unchanged at -3.5. Employment expectations fell to 96.4, the lowest since February 2021, signalling continued caution in hiring plans. Overall, the environment remains sluggish, with modest output growth and weaker overall employment and price expectations, but businesses had braced for worse. Despite ongoing risks and the need for structural adjustments, the sentiment score so far suggests that European companies are cautiously more optimistic about the months ahead.

We expect Eurozone business sentiment to support modest growth, with rising consumer confidence and improved forward expectations, though subdued output and employment indicate persistent economic risks.