EU Economy: Weekly Commentary – October 13, 2025

European Market Review

Bond yields fell. Equities declined. The euro weakened. Brent crude dropped on US-China trade tensions, higher OPEC output, and easing Middle East risks, fuelling expectations of an oversupplied oil market.

Bond yields declined last week. The spread between German and French 10-year bonds stands at 82.8 basis points. French yields initially rose following the Prime Minister’s resignation, reflecting political uncertainty and fragile fiscal credibility, before easing later in the week. The 10-year yield remains above Italy’s, and the spread over German Bunds persists at a wide level, complicating the ECB’s policy outlook and signalling potential risks for other advanced economies such as the UK. European equity indices largely closed lower, except for Portugal, which gained 0.68%. The euro weakened 0.85% versus the US dollar. Brent crude declined 3.35% amid concerns over weakening global energy demand following renewed US-China trade tensions, compounded by OPEC and other major producers increasing output and easing geopolitical risks in the Middle East, all of which contributed to expectations of an oversupplied oil market.

Europe View Synopsis

Eurozone consumer spending remains weak despite higher wages. Germany’s industrial decline signals rising recession risks. Both drag on Eurozone growth.

Eurozone retail sales remained largely stagnant in August, rising just 0.1% from July, as cautious consumers limited spending despite higher real wages. After a recovery from mid-2023 to early 2024, momentum has slowed amid renewed global trade tensions, keeping confidence subdued. While sentiment shows tentative improvement, households are absorbing inflation gains rather than increasing expenditures, suggesting muted consumption in Q3. Persistent economic uncertainty, unemployment concerns, and a preference for saving are expected to weigh on spending in the coming months. In Germany, industrial weakness intensified, with factory orders falling 0.8% in August and output contracting 4.3%, driven by sharp declines in manufacturing and automotive sectors. Temporary domestic demand gains and fiscal stimulus offer limited support, while capacity utilisation remains near decade lows. Rising inventories and shrinking order backlogs highlight structural fragilities, leaving Germany, alongside France, poised to act as a drag on overall Eurozone growth.

Consumer Spending

Eurozone retail sales remain stagnant as cautious consumers limit spending despite higher real wages. Confidence shows slight recovery, but meaningful consumption growth is unlikely in the third quarter.

Eurozone retail sales rose marginally by 0.1% in August compared to July, marking a continuation of the stagnant trend observed since April as cautious consumers remain reluctant to spend despite improved purchasing power across the bloc. Following a recovery in retail activity from mid-2023 to early 2024, momentum has faltered amid renewed global trade tensions, which have dented confidence and kept spending subdued. Although sentiment recovered somewhat after fears of an escalating trade war eased, retail trade volumes have remained broadly unchanged, suggesting another muted quarter for consumption. Underlying fundamentals, however, remain solid: wage growth continues to outpace inflation, supporting real income gains and signalling that households have largely absorbed the inflation shock of 2022. The key question now is whether consumers will choose to spend their income gains or continue to save. While recent behaviour points to caution, the latest confidence surveys indicate tentative optimism, with more households planning major purchases within the next year. Nonetheless, a significant rebound in consumer spending is unlikely in the third quarter.

We expect consumer spending to decline in the coming months due to persistent economic uncertainty, lingering concerns about unemployment, and households’ preference to save despite real income growth.

Germany’s Industrial Challenges

German factory orders and industrial production declined sharply in August. The data highlight persistent structural weaknesses. Order backlogs are shrinking and recession risks are rising. Modest domestic demand and fiscal stimulus provide limited support.

German industrial order books have once again emptied following the end of the US front-loading effect that had temporarily supported demand earlier in the year. Factory orders declined for the fourth consecutive month in August, falling by 0.8% MoM and defying expectations of a 1.2% increase. This persistent weakness highlights the fragility of Germany’s industrial sector, which continues to struggle despite government efforts to revive growth after two years of stagnation. The downturn was broad-based, with both intermediate and capital goods orders declining, while consumer goods posted only a marginal increase. Although overall order volumes have returned to levels seen at the start of the year, a modest recovery in domestic demand provides a limited source of optimism, suggesting that recently announced public investment programs in infrastructure and defence may be beginning to show early effects. The data indicate that the positive momentum earlier in the year was largely driven by temporary foreign demand, revealing ongoing structural weaknesses such as subdued global competitiveness, high energy costs, and sluggish investment in innovation.

Industrial production data for August provided an even clearer signal of distress. Output contracted by 4.3% MoM, reversing the 1.3% MoM increase in July, with the decline concentrated in the manufacturing and automotive sectors. The automotive industry saw an 18.5% MoM drop, adjusted for seasonality and working days, while production in energy-intensive sectors such as chemicals and metals also weakened. Although part of the fall may reflect temporary factors like summer shutdowns and facility upgrades, the overall trend points to a persistent lack of momentum in industrial activity. Construction output rose slightly for the second consecutive month, offering a rare bright spot. However, industrial production remains around 15% below pre-pandemic levels, and capacity utilisation continues to hover at its lowest level in over a decade. With order backlogs shrinking and inventories rising to their highest level since February, the outlook for the coming months remains subdued. Unless fiscal stimulus measures quickly translate into higher demand, the probability of another quarter of economic contraction and a technical recession has significantly increased.

We expect the German economy to remain under pressure. Germany, along with France, will be a primary drag on overall Eurozone growth.