EU Economy: Weekly Commentary – April 13, 2026

European Market Review

Euro area sovereign yields rose except Italy. German yields fell after Iran ceasefire. Equities gained. Euro strengthened. Brent crude dropped due to easing geopolitical risk.

Last week, euro area sovereign bond yields generally rose, with the exception of Italy, where yields declined by 4.49%. On April 8, German 10-year nominal yields fell sharply by 15 basis points, alongside a 10 basis point decline in 10-year inflation expectations, following news of an Iran ceasefire, while Italian 10-year yields also dropped significantly by 32 basis points to 3.66%. European equity markets advanced broadly over the week, with all major indices posting gains and Portugal the only market failing to rise by more than 2%. The euro strengthened by 1.78% against the US dollar, while Brent crude oil declined by 13.55% amid easing geopolitical risk, as US–Iran ceasefire developments raised expectations of a potential reopening of the Strait of Hormuz and improved prospects for global supply flows.

Europe View Synopsis

Eurozone growth slowed to near stagnation in March. Services weakened. Manufacturing held up. Costs rose. Confidence fell. Germany’s industry remained weak. Stagflation risks and GDP downside increased.

Eurozone private sector growth slowed sharply in March, with the Composite Output Index falling to 50.7, signalling near-stagnation and a nine-month low. The decline was driven mainly by services, where demand weakened for the first time in months, and new orders fell, resulting in the weakest activity in ten months. Manufacturing remained relatively resilient, but rising input costs from higher energy prices, supply chain disruptions, and broader inflationary pressures increased pressure on firms. Employment edged lower, particularly in manufacturing, while business confidence fell to a ten-month low. Performance across member states was uneven, with Spain leading growth, Germany slowing significantly, and France and Italy contracting. In Germany, industrial activity was already weak before the recent geopolitical escalation, with output declining slightly in February as gains in automotive were offset by losses in pharmaceuticals, electronics, and construction. Factory orders rose modestly but were driven mainly by volatile large-scale contracts, while underlying demand stayed subdued, indicating continued stagnation and heightened downside risks to growth.

Business Activity

Eurozone private sector growth slowed in March. Services demand fell. Manufacturing remained resilient. Input costs surged. Employment edged lower. Business confidence dropped. GDP risks rising amid inflation and geopolitical pressures.

The Eurozone private sector economy decelerated to a nine-month low in March, indicating a notable slowdown in business activity. The Composite Output Index fell from 51.9 in February to 50.7, signalling softer growth across the region, while the Services Business Activity Index dropped to 50.2, its weakest reading in ten months. The slowdown was concentrated in the services sector, where demand weakened for the first time since last July as new orders declined. By contrast, manufacturing output remained resilient. Input costs rose sharply, registering the fastest increase in over three years, driven by surging energy prices, supply chain disruptions, and broader inflationary pressures. Coupled with subdued new export orders, these trends point to a fragile start to the second quarter.

At the national level, economic performance in the Eurozone was uneven. Spain recorded the fastest growth in March, while Ireland expanded at a more moderate pace. Germany, the Eurozone’s largest economy, saw growth slow to its weakest year-to-date, while France and Italy recorded outright contractions. Employment in the private sector edged lower, primarily due to reductions in manufacturing jobs, and business confidence fell to a ten-month low. The combination of weakening demand, persistent cost pressures, and geopolitical uncertainties is heightening concerns about stagflation and may prompt further European Central Bank intervention. Eurozone growth forecasts for 2026 are increasingly being revised downward, with the risk of GDP contraction rising in the coming quarter unless energy and geopolitical pressures abate swiftly.

We expect the Eurozone economy to face a slower trajectory in the second quarter. While manufacturing remains resilient, the services sector is under pressure from weakening demand. Rising input costs and geopolitical uncertainties are undermining business confidence and employment, creating headwinds that could weigh on GDP growth.

German Industry

German data show weak industrial momentum before the Middle East escalation. Output declined, exports and imports were mixed, orders remained subdued, and recovery signals were absent.

German industrial data indicate the economy was already on track to contract prior to the escalation of the Middle East conflict. Industrial production declined 0.3% MoM in February, following a revised flat reading in January, with output unchanged YoY. The monthly decline was driven primarily by weaker activity in pharmaceuticals and electronics, while automotive production rebounded, partially offsetting the weakness. Construction output also contracted due to adverse weather conditions, adding to the drag on overall industrial activity. Exports increased 3.6% MoM, supported by a broad-based rebound across key trading partners, while imports rose almost 5% MoM, resulting in a modest narrowing of the trade surplus to €19.8bn, which nonetheless remains elevated by historical standards.

Factory orders rose 0.9% MoM in February, undershooting expectations, with the headline supported largely by volatile large-scale orders. Excluding these, underlying demand increased a more solid 3.5% MoM, suggesting some resilience in core manufacturing demand. However, the prior month was revised lower, leaving the broader trend largely flat and pointing to a lack of sustained momentum. Sectoral dynamics remain mixed, with continued weakness in consumer-related goods offset only partially by pockets of strength in defence-related and capital goods orders, where pipeline demand has improved amid ongoing fiscal support expectations.

Overall, the data point to subdued domestic demand and a manufacturing sector struggling to generate consistent growth momentum, leaving the economy vulnerable to another quarterly contraction even before recent geopolitical developments. While defence orders and anticipated fiscal measures provide some stabilisation at the margin, broader industrial activity remains weak and uneven, underscoring the absence of a convincing recovery trajectory.

We think that stagnation persists as German industry weakens further, with output and demand softening, orders uneven, and geopolitical conflict adding fresh downside risks.