EU Economy: Weekly Commentary – September 15, 2025

European Market Review

European bonds fell as Fitch downgraded France to A+, citing rising debt. French yields surpassed Italy’s. European equities and the euro rose, while Brent crude increased despite oversupply and geopolitical risks.

European bond markets experienced a decline in prices. Fitch downgraded France from AA- to A+ with a stable outlook, citing the government’s inability to effectively reduce the public deficit. Since Emmanuel Macron assumed office, French public debt has risen by over €1,100 billion, now exceeding €3,300 billion. Last week, the French 10-year benchmark yield surpassed Italy’s for the first time since the EU’s creation, having already outpaced previous market outliers such as Greece and Portugal. European equities advanced, led by Spain and Italy, which gained 3.08% and 2.30%, respectively, while the euro strengthened 0.10% against the US dollar. Brent crude rose 1.84% despite concerns over global oversupply following OPEC+’s announcement of higher October output and weaker U.S. demand, as markets weighed rising inventories against geopolitical risks in the Middle East and Ukraine and China’s limited capacity to absorb additional volumes.

Europe View Synopsis

The ECB held rates at 2%, citing solid growth and moderate inflation, while German July industrial production rose 1.3%, signalling tentative cyclical recovery despite structural challenges and trade uncertainties.

The European Central Bank (ECB) kept interest rates at 2%, citing solid growth, improving business sentiment, and moderate inflation, while updating forecasts that project GDP growth of 1.2% in 2025, 1.0% in 2026, and 1.3% in 2027, with inflation at 2.1%, 1.7%, and 1.9% respectively. Although downside risks have eased, a stronger euro, persistently low core inflation, and trade uncertainties leave the door open for future rate cuts, with one additional cut expected later this year. In Germany, July industrial production rose 1.3% MoM, led by mechanical engineering, automotive, and pharmaceuticals, while exports fell 0.6% and energy output declined, reflecting structural challenges such as output remaining below pre-pandemic levels and low capacity utilization. Nonetheless, the rebound, supported by manufacturing gains and June revisions, offers tentative signs of a cyclical recovery, contingent on broader economic improvements rather than temporary effects from US frontloading.

Interest Rate Decision

The ECB kept rates at 2%. It cited solid growth. Business sentiment is improving. Inflation remains moderate. Forecasts for 2025–2027 were updated. Dovish risks persist. Future easing is possible.

The European Central Bank has opted to keep interest rates on hold, with the deposit rate remaining at 2%, in line with market expectations, while providing updated macroeconomic projections that signal a cautious but optimistic outlook. The ECB highlighted encouraging summer developments that support a wait-and-see approach, including solid Q2 GDP growth, improving business sentiment, a modest rise in August inflation, and a relatively stable US-EU trade agreement, which, while positive, remains conditional and leaves room for potential disruptions. In its updated forecasts, the ECB expects GDP growth of 1.2% in 2025, 1.0% in 2026, and 1.3% in 2027, while inflation is projected at 2.1% in 2025, 1.7% in 2026, and 1.9% in 2027, reflecting upward revisions for 2025–2026 and a downward adjustment for 2027. Despite maintaining rates, the ECB acknowledged that downside risks to the economy are more benign than previously feared, yet factors such as a stronger euro, persistent core inflation below 2% for 2026–2027, and trade uncertainties could still warrant further policy easing in the future, keeping the door open for potential rate cuts.

We anticipate subdued growth, a resilient labour market, and expect one additional rate cut later this year.

German Industrial Production

July German industrial production rose 1.3% MoM. Mechanical engineering, automotive, and pharmaceuticals led gains. Exports fell 0.6% MoM. Hopes for a cyclical rebound remain.

July industrial production data offer tentative signs of a cyclical rebound in German industry, with output rising 1.3% MoM, the first increase since March, and exceeding expectations following a significant upward revision to June’s figures. The rebound was led by a 9.5% MoM rise in mechanical engineering output, alongside gains in the automotive (+2.3% MoM) and pharmaceutical (+8.4% MoM) sectors, though energy production fell 4.5% MoM, partially offsetting the overall growth. On an annual basis, industrial production grew 1.5%, supported primarily by manufacturing and automotive activity, with modest improvements in construction. Meanwhile, exports declined 0.6% MoM as imports fell 0.1% MoM, narrowing the trade balance to €14.7bn. While these developments provide some optimism for a cyclical recovery, structural challenges persist: German industrial production remains over 10% below pre-pandemic levels, energy-intensive sectors are still below 2024 levels, and capacity utilisation has remained near historic lows. Nevertheless, the July data, together with the June revisions, keep hopes alive that a genuine inventory-driven rebound may be underway, rather than a temporary effect of US frontloading, at least until the next MoM release or significant revision.

We expect a cyclical rebound in German industry to remain alive if the broader economy starts to improve, even though the disappointments of the past few years warn against premature optimism.