EU Economy: Weekly Commentary – September 1, 2025

European Market Review

European bond yields rose, with France’s credit risk nearing Italy’s. Equities fell, the euro weakened, and Brent oil dropped amid supply concerns and geopolitical uncertainties.

European bond markets saw a broad rise in yields over the week, with France now perceived as being on par with Italy in terms of risk. Following French Prime Minister François Bayrou’s announcement of a confidence vote on September 8, the 10-year yield gap between French and Italian bonds has narrowed to its tightest level since 2005, highlighting a notable decline in France’s perceived creditworthiness. The 10-year French risk spread over German Bunds has widened to nearly 80 basis points. European equities fell, led by France with a drop of over 3%, followed by declines in Spain, Portugal, and Italy, while the euro weakened 0.26% against the U.S. dollar. Brent crude prices fell 0.49%, pressured by weakening U.S. demand after the summer driving season and an expected rise in OPEC+ and allied production this autumn. Although recent U.S. crude inventory draws indicated some late-summer demand, market concerns remain that production increases could outpace consumption. Additional downward pressure stems from uncertainties surrounding Russian oil exports, geopolitical tensions, and potential U.S. tariffs affecting global trade, all contributing to bearish sentiment.

Europe View Synopsis

Eurozone economic sentiment deteriorated, marked by subdued consumer confidence, measured business optimism, elevated inflation expectations, and fragile labour markets, which will reinforce stagflation pressures this year.

Eurozone economic sentiment declined in August, with the Economic Sentiment Indicator dropping to 95.2, well below its long-term average of 100, reflecting subdued consumer and business confidence, rising inflation expectations, modest labour optimism, and restrained bank lending growth. Confidence weakened across industry, services, construction, and households, while retail trade showed a slight improvement; Spain recorded the steepest decline, Germany and Italy fell, France remained broadly stable, and the Netherlands rebounded. Household inflation expectations increased despite easing perceptions of recent price pressures, while business pricing intentions were mixed. Employment expectations edged higher to 97.8, supported by hiring plans in industry, retail, and construction. In Germany, unemployment exceeded three million in August, highlighting prolonged stagnation, declining vacancies, weak retail sales, and fragile consumer sentiment. Business optimism improved, driven by fiscal stimulus, but consumer confidence fell for the third consecutive month to -23.6 amid job and inflation concerns. Overall, subdued Eurozone and German sentiment, weak labour markets, and ongoing uncertainty point to modest growth and persistent stagflation risks.

Eurozone Economic Sentiment

Eurozone sentiment fell to 95.2 in August, reflecting weak consumer and business confidence, rising inflation expectations, modest labour optimism, and steady but limited bank lending growth.

Eurozone economic sentiment weakened further in August, with the European Commission’s Economic Sentiment Indicator falling by 0.5 points to 95.2, well below the long-term average of 100 and underscoring the fragility of the recovery amid persistent inflation expectations and mixed labour market signals. Confidence slipped across industry, services, construction, and consumers, while only retail trade showed a slight improvement; Spain posted the sharpest fall, Germany and Italy also declined, France was broadly stable, and the Netherlands rebounded strongly. Inflation expectations among households continued to rise despite easing perceptions of recent price pressures, while business pricing intentions fell in industry and retail, remained stable in construction, and rose for a second month in services. The Economic Uncertainty Indicator edged down slightly, though consumers and construction firms reported more concern about household finances. On the labour front, the Employment Expectations Indicator ticked up to 97.8, supported by stronger hiring plans in industry, retail, and construction, while services were unchanged. Alongside steady bank lending growth, which increased year-on-year in July to 2.4% for households and 2.8% for corporates, these developments point to some improvement in third-quarter growth compared with the weak second quarter, though momentum remains subdued and far from signalling a strong rebound.

We anticipate that Eurozone sentiment will remain subdued, reflecting a weakening labour market, heightened political instability, and ongoing uncertainty over trade tariffs, alongside modest growth and restrained consumer confidence.

German Labour Market

German unemployment hit a decade-high above three million as stagnation deepens, vacancies fall, retail sales drop, and weak consumer sentiment heightens concerns over Germany’s economic resilience.

German unemployment has risen above three million for the first time since 2015, reaching 3.025 million in August after an increase of 45,700, the highest level in over a decade and a stark reflection of the toll that prolonged economic stagnation and structural challenges are taking on the labour market. Although the seasonally adjusted unemployment rate remained unchanged at 6.3%, the trend has been deteriorating steadily since unemployment hit a low of 2.2 million in May 2022, with weak recruitment plans, declining vacancies, and rising bankruptcies signalling that conditions could worsen further. The retail sector offers little relief, with sales falling by 1.5% MoM in July, underlining fragile consumer sentiment and reflecting households’ growing concerns over disposable income amid higher job insecurity. Cost-cutting measures in key industries such as automotive further add to the strain, and while demographic pressures and persistent labour shortages may prevent a return to the extreme levels of the early 2000s, the combination of rising unemployment, falling consumption, and weak economic momentum raises serious concerns about Germany’s near-term growth prospects.

We expect stagflation to persist, with a weak labour market weighing on household incomes and further suppressing consumer spending, intensifying pressure on Germany’s already fragile economy.

German Sentiment

German businesses remain optimistic, boosted by fiscal stimulus, while consumer confidence falls due to job and inflation concerns, highlighting a divergence that may constrain near-term economic recovery.

German businesses remain notably optimistic, with the Ifo Business Climate Index rising for the eighth consecutive month to 89.0 in August, its highest level in over two years. This increase was driven entirely by elevated expectations, which climbed to 91.6, the highest since the start of the Russian invasion of Ukraine, while the assessment of current conditions edged slightly lower to 86.4, creating a 5.2-point gap between sentiment and reality, the largest optimism gap since March 2021. Despite last week’s disappointing GDP figures, companies appear focused on potential positives, particularly the expected benefits of fiscal stimulus, though the sources of optimism, whether inventory cycle improvements, US tariff developments, or other factors, remain uncertain. Looking ahead, German economic momentum will depend heavily on trade dynamics, the euro exchange rate, and government stimulus, yet lingering uncertainties around US tariffs and domestic austerity debates pose risks to investment and consumption. While fiscal stimulus for infrastructure and defence may eventually boost activity, export pressures and a strong euro suggest that robust growth could remain elusive in the near term.

In contrast, consumer sentiment has weakened for the third consecutive month, reflecting growing household concerns about possible job losses and ongoing inflation uncertainty. The GfK Consumer Confidence Index, measuring confidence for September, fell to -23.6 points versus expectations of -21.5, driven in large part by a sharp decline in income prospects, the lowest level since March. This divergence between strong corporate optimism and cautious household sentiment highlights the challenges for Germany’s economic recovery, as subdued consumer spending may offset some of the anticipated gains from fiscal stimulus and business investment.

We expect Germany to face stagflation this year. The economy is weighed down by structural problems and a lack of innovation. Weak consumer demand, ongoing trade uncertainty, and persistent inflation further constrain growth.