EU Economy: Weekly Commentary – Janurary 19, 2026

European Market Review

Italian yields fell, narrowing spreads, while EU equities rose. France lagged. Brent crude climbed on Iran tensions, as Middle East risks sustained an oil premium.

Last week, bond yields declined, once again led by Italy, where yields fell by 4.27 basis points, while the spread between the Italian 10-year government bond and its German equivalent continued to narrow, reaching 59.8 basis points. Equity markets across the European Union recorded gains, with the notable exception of France, where the equity index declined by 1.23%. Brent crude oil advanced by 1.87%, supported by persistent tensions involving Iran. Although immediate concerns over a U.S. response to recent violent protests have eased, geopolitical risks remain elevated as the United States strengthens its military presence in the Middle East, sustaining a risk premium in oil prices.

Europe View Synopsis

Eurozone industrial production rose 0.7% in November, reaching a two-and-a-half-year high, driven by capital goods. Germany’s GDP grew 0.2% in 2025, supported by consumption and fiscal stimulus.

Eurozone industrial production rose 0.7% in November, marking the third consecutive monthly increase and reaching a two-and-a-half-year high, excluding the exceptional surge in March 2025. Growth was broad-based, led by capital goods, which are 3.6% higher than a year ago, and supported major economies like Germany, France, and Italy. Despite a decline in the manufacturing PMI from 50.7 in August to 48.8 in December, ongoing domestic investment and planned infrastructure projects are expected to sustain production gains. The industrial sector is benefiting from trends in reindustrialisation, digitalisation, electrification, and defence, favouring manufacturers, component suppliers, and raw material producers. In Germany, GDP grew 0.2% in 2025, ending two years of contraction, driven by consumption, government spending, and an industrial rebound. Fiscal stimulus and energy cost reductions support a tentative recovery, with 1% growth expected in 2026. Structural reforms will be essential for long-term sustainable expansion, indicating cautious optimism for both the Eurozone and Germany.

Industrial Production

Eurozone industrial production rose 0.7% in November, reaching a two-and-a-half-year high, driven by capital goods and broad-based growth, despite declining PMI and short-term uncertainty.

Eurozone industrial production continued its upward trajectory in November, rising 0.7% and marking the third consecutive monthly increase. Excluding the exceptional surge in March 2025, production is now at its highest level in two-and-a-half years, supported primarily by capital goods, which are 3.6% higher than a year ago. The increase reflects broad-based growth across most major Eurozone economies, including Germany, France, and Italy, despite earlier volatility linked to American frontloading in 2025. While short-term prospects remain uncertain, particularly as the manufacturing PMI has declined from 50.7 in August to 48.8 in December, ongoing domestic investment and planned infrastructure projects are expected to sustain production gains over the year. Overall, the Eurozone industrial sector appears to be regaining momentum, suggesting a cautious but improving outlook for manufacturing and capital investment.

We expect Europe to see a surge in capital investment across reindustrialisation, digitalisation, electrification, and defence, benefiting industrial manufacturers, component distributors, and raw material suppliers driving this heavy-industry growth.

German GDP

Germany’s economy grew 0.2% in 2025, exiting two years of contraction. Growth was driven by consumption and government spending. Industrial rebound and fiscal stimulus suggest 1% growth in 2026.

Germany emerged from stagnation in 2025, recording its first annual GDP growth since 2022, with the economy expanding by 0.2% after two consecutive years of contraction. Growth was primarily supported by household consumption and government spending, while private investment fell by 1.1% and net exports continued to weigh on overall performance. Industrial orders increased for three consecutive months, signalling a potential rebound in manufacturing, and fiscal stimulus in the form of infrastructure and defence spending is expected to inject additional momentum into the domestic economy in 2026. Defence procurement could have a significant domestic impact due to the rapid expansion of production capacity. Measures to reduce energy costs by approximately two-thirds are also anticipated to ease pressure on both companies and households. Despite these positive signals, private consumption is likely to remain subdued because unemployment has risen by roughly 500,000 over the past four years, corporate insolvencies have not yet declined, and demographic pressures, along with pension system uncertainty, continue to constrain spending. GDP growth of around 1% is expected in 2026, reflecting a tentative recovery rather than a full economic turnaround. Sustainable long-term growth will depend on structural reforms, including reducing bureaucracy, implementing e-government initiatives, reforming taxation, and managing the financial challenges of an ageing population. Early signs indicate that Germany’s economy is turning a corner, but the path from rebound to durable recovery will require decisive policy action and careful management of both domestic and external economic risks.

We expect Germany’s economy to achieve a modest recovery in 2026 after 0.2% growth in 2025. Fiscal stimulus and industrial rebound support optimism, but structural reforms are needed for sustainable expansion.