EU Economy: Weekly Commentary – July 21, 2025

European Market Review

European bond yields fell despite global long-term rises. UK 10-year yields climbed to 4.68%. Mixed equities, euro weakened, Brent crude dropped amid EU oil price cap and demand concerns.

European bond markets experienced a decline in yields over the week, despite a global rise in long-term yields. German 30-year rates reached their highest levels since 2023, while UK sovereign bond yields rose significantly, with 10-year UK bond yields increasing from 0% to 4.68% over five years. This reflects mounting market concerns amid political reluctance to finance spending through cuts or taxes. The UK government has massively increased its budget and imposed higher taxes, damaging the economy without any accountability or resignations. European equities delivered mixed results, with Portugal falling 0.58% while other markets posted gains. The euro depreciated 0.55% against the US dollar. Brent crude prices fell 1.98%, pressured by the EU’s implementation of a 15% price cap on Russian oil, compounded by fears of weakening global demand and rising OPEC+ production.

Europe View Synopsis

Eurozone industrial production rose 1.7% in May, led by pharmaceuticals, but trade tensions and uneven sector performance keep outlook uncertain.

In May 2025, Eurozone industrial production rose 1.7%, driven primarily by a record 27.7% surge in pharmaceutical output in Ireland due to increased exports to the U.S., alongside gains in non-durable consumer goods, capital goods, and energy sectors. However, production remained uneven, with declines in intermediate and durable goods and mixed performance across countries—strong growth in Ireland and Germany contrasted with declines in France and Italy, and modest gains in Spain. Despite some signs of stabilization, ongoing trade tensions and tariff uncertainties continue to cloud the outlook, making future industrial output volatile. In Germany, investor sentiment improved in July, supported by a €46 billion tax relief package, a €500 billion infrastructure fund, and hopes for a US-EU trade deal, with the ZEW Economic Sentiment Index rising to 52.7. Nevertheless, economists warn that without a resolution to tariff disputes, this optimism may fade, risking slower GDP growth amid persistent global trade risks.

Industrial Production

Eurozone industrial production rose 1.7% in May, driven by pharmaceuticals and non-durable goods, but uneven sectoral performance and trade tensions continue to cloud the broader outlook.

Eurozone industrial production rebounded strongly in May 2025, rising 1.7% from April and nearing March’s recent peak, largely driven by a record 27.7% surge in pharmaceutical output—concentrated in Ireland—amid renewed frontloading of exports to the U.S., which remain exempt from tariffs despite ongoing threats. While this upswing could result in a less negative second-quarter GDP than initially expected, the overall production landscape remains mixed: output for non-durable consumer goods jumped by 8.5%, capital goods rose 2.7%, and energy production increased 3.7%, while intermediate goods and durable consumer goods declined by 1.7% and 1.9% respectively. Sectoral variation highlights the uneven nature of the recovery, with Ireland’s 12.4% rise in industrial output far outpacing Germany’s 2.2%, while France and Italy posted declines and Spain recorded only modest growth. Despite some tentative signs that Eurozone manufacturing may be bottoming out, ongoing trade tensions and tariff uncertainty continue to cast a shadow over the outlook.

We expect Eurozone industrial production to remain volatile in the coming months, with trade tensions and tariff risks posing ongoing threats despite signs of stabilisation in select sectors.

German Sentiment

German investor morale rose in July, boosted by government stimulus and tariff hopes, but economists warn optimism may fade without a US-EU trade deal.

German investor morale exceeded expectations in July, with the ZEW Economic Sentiment Index rising to 52.7 points from 47.5 in June. The assessment of the current economic situation also improved significantly, climbing from -72 to -59.5. Confidence was supported by the German government’s recently approved €46 billion tax relief package and a €500 billion infrastructure fund aimed at stimulating growth through 2029, alongside anticipated interest rate cuts by the European Central Bank. Despite ongoing global trade uncertainties and the threat of US tariffs on EU imports, nearly two-thirds of experts surveyed expect the German economy to improve. Optimism is largely driven by hopes for a swift resolution to the US-EU tariff dispute and the government's immediate investment initiatives. However, economists caution that without a trade deal, the positive sentiment could quickly deteriorate, as higher tariffs are likely to dampen trade and investment, potentially slowing GDP growth in the near term. The survey mostly predates recent US tariff threats, suggesting investor sentiment could be vulnerable if such tariffs are implemented.

We expect a stagflation year in Germany despite the stimulus measures and hopes for a resolution to the US-EU tariff dispute.