EU Economy: Weekly Commentary – October 20, 2025

European Market Review

Bond yields declined last week, with Germany viewed as stable and France downgraded to A+. European stocks were mixed, the euro strengthened, and Brent crude fell amid supply pressures and geopolitical uncertainty.

Bond yields declined last week. Germany continues to be viewed as a financial stability benchmark, particularly in contrast to France, which experienced its third credit-rating downgrade this year. The cost of insuring against a German default remains minimal at 9 basis points, roughly a quarter of France’s level, while markets currently assign default probabilities of 0.9% for Germany and 3.4% for France. S&P unexpectedly downgraded France to A+, citing political instability, rising debt, and uncertainty around fiscal consolidation, despite the government surviving no-confidence votes and presenting its 2026 budget. European equity markets closed a mixed week, with Germany’s index down 1.69% and France’s up 3.24%. The euro strengthened 0.28% against the U.S. dollar. Brent crude declined 1.21%, pressured by rising U.S. crude inventories, India’s suspension of Russian oil imports, and heightened geopolitical uncertainty following a potential Trump-Putin meeting on Ukraine.

Europe View Synopsis

Eurozone inflation rose to 2.2%. Core inflation reached 2.4%. Industrial production fell 1.2%. Growth prospects remain weak, reflecting uneven economic momentum across countries.

Eurozone inflation rose slightly to 2.2% in September 2025 from 2.0% in August, driven mainly by services and food, while energy eased. Core inflation, which excludes energy and unprocessed food, remained elevated at 2.4%, reflecting persistent underlying price pressures in services and non-energy goods. Month-on-month, consumer prices increased modestly, with core inflation rising slightly faster. Inflation varied across countries, with Germany at 2.4%, Spain 3.0%, Italy 1.8%, and Cyprus 0.0%. The ECB is expected to keep interest rates on hold, with inflation likely to stabilize around its 2% target. Meanwhile, industrial production fell 1.2% in August, led by Germany, Italy, and Greece, while Ireland’s surge masked broader weakness, leaving short-term growth prospects subdued.

Inflation

Eurozone inflation rose modestly, driven by services and food, while energy eased. Core pressures persist, signalling uneven national dynamics and supporting expectations of stable ECB policy.

Eurozone annual inflation rose to 2.2% in September 2025, up from 2.0% in August, driven primarily by services (+1.49 pp) and food, alcohol & tobacco (+0.58 pp), while energy’s contribution remained slightly negative (-0.03 pp). Services inflation remained elevated at 3.2%, reflecting sustained price pressures in housing, transport, and personal services, while core inflation, which excludes energy and unprocessed food, increased to 2.4% from 2.3%, slightly above expectations, signalling persistent underlying pressures across services and non-energy industrial goods. On a month-on-month basis, consumer prices rose modestly by 0.1%, with core inflation advancing slightly faster at 0.2%, indicating mild acceleration in underlying trends. National data highlight divergence within the euro area, with Germany at 2.4%, Spain at 3.0%, and Italy and Cyprus at 1.8% and 0.0% respectively, reflecting differences in consumption patterns and pricing power. Against this backdrop, the ECB is expected to maintain its current monetary policy stance, keeping interest rates on hold, as headline inflation shows signs of moderation while core and services inflation point to ongoing underlying pressures, supporting expectations that inflation will stabilize around, and potentially slightly below, the ECB’s 2% medium-term target.

We expect Eurozone inflation to remain volatile but broadly stable, supported by a weak economy, low consumer sentiment, and overall economic softness, particularly in the region’s main economies.

Industrial Production

Eurozone industrial production dropped 1.2% MoM in August, with Germany, Italy, and Greece leading declines. Ireland’s surge masked weakness, leaving short-term growth prospects subdued.

Eurozone industrial production fell by 1.2% MoM in August, reversing July’s modest 0.3% rebound and highlighting that the region’s recovery remains fragile despite improving business confidence. The decline was mainly driven by notable drops in capital goods and durable consumer goods output, which pushed overall production to its lowest level since January. Ireland was the only significant outlier, posting a 9.8% MoM surge in production, although this figure is typically volatile and tends to distort the aggregate data. Excluding Ireland, eurozone industrial output would have been considerably weaker, with Germany, Italy, and Greece all reporting declines of more than 2% MoM, while France and Spain recorded smaller falls of under 1% MoM. The Netherlands stood out as a relatively bright spot among major industrial economies, registering a 2.3% MoM increase in production. Despite the recent rebound in manufacturing sentiment, hard data indicate that the industrial sector continues to lose momentum following the earlier boost from US frontloading of European goods. Although production levels remain above late-2024 lows, the downward trend is becoming more pronounced. With large-scale investment projects across the euro area yet to take effect, optimism about the medium-term outlook contrasts sharply with weak short-term prospects, suggesting that manufacturing is unlikely to have supported GDP growth in the third quarter and that overall growth expectations will remain muted.

We expect continued weak economic activity in the EU, with industrial underperformance likely reducing competitiveness compared with other major global economies.