EU Economy: Weekly Commentary – July 14, 2025

European Market Review

European bond yields rose sharply amid debt concerns, while equities gained and oil prices climbed on tightening supply. The euro weakened, and geopolitical risks increased.

European bond markets came under significant pressure, with 10-year yields rising by more than 10 basis points and the spread between French and German 10-year bonds widening further above 73 basis points, highlighting persistent concerns about fiscal divergence within the euro area. German long-term yields rose sharply, with the 30-year Bund yield reaching 3.23%, nearing its highest level in 14 years. This move reflects growing investor unease over Germany’s rising debt trajectory, as the government plans to issue €850 billion in new debt over the next four years. Real long-term interest rates also increased, with 10-year real yields surpassing 0.93%, marking their highest level since 2011 and indicating tighter financial conditions across the region. Despite rising yields, European equity markets recorded strong gains, with Germany outperforming and posting a weekly increase of nearly 2%. In currency markets, the euro depreciated by 0.76% against the US dollar. Commodity markets saw renewed strength in oil, as Brent crude rose 3.09% on the back of a tightening supply outlook. The International Energy Agency warned that the market is tighter than headline figures suggest due to increased summer demand. Saudi Arabia reaffirmed its commitment to OPEC+ production cuts, while Russia pledged to compensate for earlier overproduction. Strong crude exports to China underscored robust demand from Asia, and a continued decline in the number of active drilling rigs in the United States points to lower future supply. Geopolitical risks remain elevated, with markets closely monitoring Donald Trump’s forthcoming announcement on Russia and the potential imposition of new European sanctions, both of which could further destabilize global markets.

Europe View Synopsis

Eurozone retail sales fell sharply in May 2025 amid slowing growth and trade tensions. Germany’s industry rebounded modestly but faces challenges from exports and a strong euro.

Eurozone retail sales declined sharply by 0.7%, marking the steepest monthly drop since 2023, amid slowing economic momentum and subdued consumer spending driven by rising uncertainty, higher savings rates, and ongoing trade tensions with the US. The decline affected food, non-food products, and automotive fuel sales, while overall services output fell 0.3%, especially in ICT and real estate sectors, signalling a softer economic phase. Meanwhile, German industrial production showed signs of a cyclical rebound with a 1.2% increase in May, led by strong growth in automotive, energy, and pharmaceuticals, although construction activity weakened and exports dropped by 1.4%, pressured by trade tensions and a strong euro. June data indicated rising inventories and softer orders, raising doubts about a sustained recovery. Combined with drought-related challenges and trade uncertainties, these factors suggest continued stagflation and sluggish growth in both the Eurozone and Germany through 2025, despite positive medium-term prospects supported by government investments.

Retail Sales

Eurozone retail sales fell sharply in May, alongside weaker services output, rising uncertainty, and trade tensions, all pointing to slowing economic momentum and subdued consumer spending.

Eurozone retail sales fell by 0.7% in May 2025, marking the steepest monthly decline since 2023 and reinforcing evidence of weakening economic momentum in the second quarter. Compared with April, the volume of retail trade declined by 0.7% for food, drinks, and tobacco, by 0.6% for non-food products excluding automotive fuel, and by 1.3% for automotive fuel in specialised stores. This contraction in consumer spending aligns with a 0.3% decline in overall services output in April, driven notably by weakness in ICT and real estate activities, and confirms that the euro area economy has entered a softer phase. Early-year retail resilience, supported by solid wage growth, has given way to more cautious consumer behaviour amid elevated uncertainty, rising savings rates, and persistently low confidence. Mounting trade tensions with the United States further cloud the outlook, raising the risk of additional headwinds through the trade channel. While purchasing power is gradually improving, its translation into actual spending remains limited. The slight uptick in the June services PMI points to stagnation rather than recovery. Against this backdrop, the combination of sluggish domestic demand and weakening external support suggests that Eurozone GDP is likely to soften further in the coming quarters, following strong early-year growth.

We expect Eurozone consumer spending to remain weak, weighing on GDP growth, as declining retail and services activity, rising uncertainty, and trade pressures offset earlier support from wage-driven consumption.

German Economy

German industry shows early cyclical rebound driven by key sectors. Export declines, trade tensions, a strong euro, and drought risks pose near-term economic challenges.

May’s industrial data suggests that German industry is exhibiting signs of a genuine cyclical rebound beyond the effects of US front-loading, although it remains premature to declare a sustained recovery. Industrial production in Germany rose by a stronger-than-expected 1.2% MoM in May, following a 1.6% contraction in April, and registered a 1% increase year-on-year. This improvement was primarily driven by significant growth in key sectors: automotive production increased by 4.9%, energy production rose by 10.8%, and pharmaceutical output grew by 10%, while the construction sector continued to weaken, exerting a notable drag on overall economic activity in Q2. Early-year indicators, including improving industrial orders and inventory reductions, had signalled a potential cyclical upswing, which was further accentuated by front-loading activity from the US in anticipation of tariffs. However, June survey data reveals a reversal in this trend, with inventories rising and order books softening, casting doubt on whether the initial inventory cycle turn was cyclical or largely front-loading related. Looking forward, German industry confronts heightened near-term headwinds from persistent trade tensions, the appreciating euro—effectively an additional trade barrier—and historically low river water levels driven by severe drought conditions. Despite these challenges, the German government’s continued fiscal discipline and execution of investment plans underpin positive medium-term growth prospects, sustaining expectations for stronger expansion from 2026 onwards.

Meanwhile, German exports fell 1.4% in May, driven by a sharp 7.7% decline to the US, marking their lowest level in over three years and extending the reversal of earlier front-loading gains. Imports dropped nearly 4%, widening the trade surplus to €18.4 billion. Despite no new US tariffs on the EU, persistent trade uncertainties and the euro’s appreciation continue to challenge exporters. Alongside weakening retail sales and construction activity, these factors point to stagnation or a mild contraction in Q2, despite modest industrial production gains and improving business sentiment.

We expect stagflation in Germany at least through this year, driven by export declines, trade tensions, a strong euro, and ongoing drought-related challenges.