EU Economy: Weekly Commentary – March 16, 2026

European Market Review

Eurozone yields rose as inflation expectations increased. European stocks were mixed. The euro weakened against the dollar. Brent surged on Iran tensions and Hormuz disruption fears.

Eurozone sovereign bond yields rose significantly during the week, driven by a sharp increase in inflation expectations. In Germany, long-term inflation expectations moved higher, with markets pricing average inflation of 2.96% over a 10-year horizon, well above the European Central Bank’s 2% target and the highest level since 2023. European equity markets delivered a mixed performance, with Portuguese equities rising more than 2% during the week and Italy gaining 0.37%, while most other major indices closed lower. In currency markets, the euro depreciated 1.71% against the US dollar, reflecting investor sentiment that the European economy may be more vulnerable to a potential escalation involving Iran. Meanwhile, Brent crude surged 11.33% amid escalating geopolitical tensions with Iran following attacks on oil tankers in the Strait of Hormuz, a critical chokepoint for global oil shipments. The incidents and renewed threats to close the strait heightened concerns about disruptions to Middle Eastern oil supply, pushing prices closer to $100 per barrel as markets priced in the risk of tighter supply and renewed inflationary pressures.

Europe View Synopsis

Eurozone industrial output fell sharply in January. Germany experienced a decline. Energy costs, geopolitical tensions, and supply disruptions weighed on production, exports, and trade. Fiscal support may delay recovery.

Eurozone industrial production fell sharply in January, declining 1.5% MoM and 1.2% YoY, well below forecasts, as energy costs, geopolitical tensions, and supply disruptions weighed on output. The contraction was broad-based, with non-durable consumer goods down 6.0% MoM, capital goods 2.3%, and durable goods 1.9%, while major economies, including Germany, Italy, and Spain, also recorded declines, signalling systemic weakness. Germany’s industrial output fell 0.5% MoM, with new orders collapsing 11.1%, reflecting lingering post-pandemic backlog effects and delayed catch-up in production. German exports dropped 2.3%, imports fell 5.9%, widening the trade surplus to €21.2 billion, largely driven by weak domestic demand and reduced shipments to the US and China amid rising competition from imports. While €200 billion in planned fiscal stimulus for defence and infrastructure could provide support, rising energy prices and ongoing geopolitical risks, particularly in the Middle East, continue to challenge recovery prospects, leaving Eurozone and German industrial activity subdued with fragile momentum likely to delay a sustained rebound.

Industrial Production

Eurozone industrial output declined by -1.5% MoM in January, missing forecasts. Germany declined. Energy costs, geopolitical tensions, and supply disruptions threaten recovery despite planned fiscal stimulus.

Eurozone industrial growth faces renewed headwinds as elevated energy costs and geopolitical tensions weigh on manufacturing output, eroding prior optimism amid a pronounced slowdown. Industrial production in the euro area declined by -1.5% MoM and -1.2% YoY in January, sharply missing forecasts of +0.6% MoM and +1.4% YoY, and marking the lowest level since December 2024. The downturn was broad-based, with non-durable consumer goods falling -6.0% MoM, capital goods declining -2.3% MoM, intermediate goods down -1.9% MoM, and durable consumer goods slipping -1.9% MoM. Volatile Irish data exacerbated the drop, while key economies including Italy and Spain also recorded MoM contractions, indicating that the weakness is widespread. Although the European Commission continues to advance the Industrial Accelerator Act, the Middle East conflict has emerged as a significant drag on output, particularly for energy-intensive sectors, as rising energy prices and disrupted supply chains constrain production. Expectations for a manufacturing rebound, underpinned by public investment in defence and infrastructure, now face renewed risks, suggesting that earlier optimism in Eurozone industrial activity may have been premature.

German industrial production started 2026 on a weak footing, falling 0.5% MoM in January following a revised 1.0% MoM decline in December, with output still only slightly above pre-pandemic levels and struggling to gain sustained momentum. On a YoY basis, production dropped 1.2%, driven primarily by weakness in metals, chemicals, and pharmaceuticals. New industrial orders collapsed 11.1% MoM, reversing December’s bulk-order surge, while underlying orders, excluding bulk effects, fell 0.4% MoM. This suggests that the “ketchup-bottle effect” in German industry, a delayed catch-up after prior disruptions, remains in the build-up phase, implying a weak first quarter despite improving production expectations, rising order books since last summer, and gradually declining inventories. The outlook is clouded by the war in Iran and surging oil prices, which threaten energy-intensive sectors that account for roughly 17% of industrial gross value added and nearly one million jobs. While €200 billion in planned fiscal stimulus for defense and infrastructure provides a potential tailwind, January’s MoM and YoY declines confirm that any industrial rebound is far from assured, and the path to sustained growth will likely face continued volatility.

We expect industrial activity to remain subdued in Q1, with fragile momentum and rising oil prices likely delaying a meaningful rebound despite robust order books and substantial fiscal support.

German Exports

German exports fell 2.3% in January, imports dropped 5.9%, widening the trade surplus to €21.2 billion. Weak domestic demand, falling exports to the US and China, and rising imports signal a slow, uneven economic recovery.

German exports fell by 2.3% in January compared with December, while imports dropped sharply by 5.9%, pushing the trade surplus to €21.2 billion, the highest since the summer of 2024. This widening surplus is not a sign of stronger exports but reflects weaker domestic demand, highlighting ongoing challenges for Germany’s export-oriented economy. The data also reveal how geopolitical shifts are reshaping trade patterns. Exports to the US fell to 9.5% of total shipments in 2025, while China’s share dropped to 5%, roughly equal to that of Austria. At the same time, imports from China rose more than 10%, increasing competition for German producers. Looking ahead, exporters face multiple headwinds including US tariffs, weaker Chinese demand, higher energy costs, geopolitical tensions, and reliance on Chinese rare earths. Combined with January declines in retail sales, industrial production, and construction, these trends suggest that Germany’s recovery will be slow and uneven, despite expectations that fiscal stimulus could support growth later in the year.

We expect Germany’s weak January trade data, driven by falling exports and sluggish domestic demand, to weigh on economic growth, as exporters face ongoing challenges from US tariffs, slowing Chinese demand, and rising energy and geopolitical pressures.