EU Economy: Weekly Commentary – September 22, 2025

European Market Review

European bond yields rose amid fiscal concerns, with German 30-year at 3.35%. European equities fell, the euro strengthened, Brent crude slipped, and geopolitical risks heightened market uncertainty.

European bond markets retreated this week. The German 30-year yield climbed to 3.35%, its highest level since 2011. The spread between German and French 10-year bonds widened to 80.5. Euro area yields are rising as the fiscal crisis and stagnation erode confidence in its sovereign bonds. Equity markets in Europe ended broadly lower, led by Italy (-0.60%) and the UK (-0.72%), though France gained 0.36%. The euro strengthened 0.10% against the U.S. dollar. In commodities, Brent crude slipped 0.33% as weak demand indicators outweighed support from the Fed’s rate cut and a drawdown in U.S. crude stockpiles, with additional downward pressure from higher distillate inventories. Heightened geopolitical risks, including Russian supply disruptions and OPEC’s pricing strategy, added to investor uncertainty.

Europe View Synopsis

Eurozone industrial production rose 0.3% MoM in July. Germany led the recovery. The trade surplus narrowed, and exports slowed. Investor sentiment improved amid tariffs, inflation, and global economic uncertainties.

Eurozone industrial production rebounded in July, increasing 0.3% MoM following a 0.6% decline in June, with Germany leading the recovery at a 1.5% gain. Growth was supported by intermediate (0.5%), capital (1.3%) and consumer goods, both durable (1.1%) and non-durable (1.5%), while energy output contracted by 2.9%. German financial confidence strengthened in September, particularly in export-oriented sectors including automotive, chemicals, pharmaceuticals and metals, despite ongoing U.S. tariff pressures. The Eurozone trade surplus narrowed to €12.4 billion in July, down from €18.5 billion YoY, reflecting slower export growth and rising imports amid weak global demand, notably from the U.S. and China. Seasonally adjusted data indicate a modest surplus of €5.3 billion, underscoring subdued external demand. Investor sentiment in Germany and the Eurozone improved in September, signalling cautious optimism; however, persistent uncertainties, including tariffs, inflationary pressures and domestic reforms, may temper the trajectory of industrial activity and broader economic recovery.

Industrial Production

Eurozone industrial production grew 0.3% in July, led by Germany. Consumer and capital goods rose, energy fell. Resilience persists despite U.S. tariffs; confidence and fiscal support may boost growth.

Industrial production in the Eurozone returned to growth in July, rising 0.3% month-on-month following a 0.6% decline in June. The increase was led by a 1.5% rise in Germany, historically the region’s industrial engine, despite recent challenges from high energy costs and global competition. Production grew for intermediate goods (0.5%), capital goods (1.3%), durable consumer goods (1.1%), and non-durable consumer goods (1.5%), offsetting a 2.9% decline in energy output. On a year-on-year basis, Eurozone output increased 1.8% in July. German financial confidence edged up in September, driven by improved sentiment in export-oriented sectors, including automotive, chemical, pharmaceutical, and metal industries, according to a ZEW survey. While U.S. tariffs continue to pose a risk to exports, the Eurozone industry has shown resilience, expanding in two of the four months since tariff announcements in April. Front-loading of consumer-goods production earlier in the year, particularly in pharmaceuticals, contributed to this performance. The EU-U.S. tariff agreement at the end of July eased fears of a wider trade war but introduced higher levies than previously. Industrial activity could benefit from Germany’s increased fiscal spending on defence and infrastructure and the effects of earlier European Central Bank rate cuts. Surveys indicate that overall manufacturing confidence across Europe has remained relatively positive over the summer months.

We expect a slight rebound in Eurozone industrial activity, led by consumer and capital goods, but growth could be offset by a global economic slowdown and trade uncertainties.

Trade Balance

In July 2025, Eurozone exports slowed, imports rose, and weak global demand, especially from the US and China, narrowed the trade surplus, weighing on Q3 growth.

The euro area recorded a trade surplus of €12.4 billion, up from €8.0 billion in June but markedly below the €18.5 billion surplus registered in July 2024, representing one of the smallest trade surpluses of the past decade outside the energy crisis. The month-on-month improvement was mainly driven by rising surpluses in chemicals and related products, which increased from €15.4 billion to €17.4 billion, and machinery & vehicles, which rose from €13.7 billion to €18.5 billion, while the year-on-year decline reflected a drop in chemicals from €23.8 billion to €17.4 billion. Euro area exports to the rest of the world rose slightly by 0.4% YoY to €251.5 billion, whereas imports increased by 3.1% to €239.1 billion. Over January–July 2025, the cumulative trade surplus declined to €106.9 billion from €120.4 billion in the same period of 2024, with exports increasing 3.5% to €1,739.3 billion and imports rising 4.7% to €1,632.4 billion, while intra-euro area trade grew modestly by 1.6% to €1,549.8 billion. Seasonally adjusted data for July highlight a more subdued trend, with exports declining 0.1% from June and imports falling 0.8%, leaving the adjusted surplus at €5.3 billion, well below historical norms. The slowdown reflects soft global demand, as exports to the United States stabilised below 2024 averages following tariff increases, narrowing the US trade deficit with the Eurozone from around €15 billion per month in 2024 to €9 billion in July 2025, while exports to China continued a slight downward trend. Weak export orders and subdued external demand suggest that net exports will likely dampen Eurozone economic growth in the third quarter, even as the manufacturing sector shows more optimism, driven largely by domestic demand. Overall, the Eurozone’s export performance remains muted, highlighting the combined impact of tariffs, slower global growth, and the fading effects of earlier US frontloading of European goods.

We expect Eurozone exports to remain subdued in Q3, as tariffs, elevated inflation, and a stronger euro against the U.S. dollar continue to constrain economic growth.

Investor Sentiment

German and Eurozone investor sentiment rose in September, surpassing forecasts, with modest improvements in current conditions and inflation expectations, reflecting cautious optimism amid ongoing economic and policy uncertainties.

German and Eurozone investor sentiment exceeded expectations in September, signalling cautious optimism despite ongoing economic challenges. Germany’s ZEW economic sentiment index rose to 37.3 points, beating estimates of 25.3 and up 2.6 points from August, while the Eurozone index climbed to 26.1 points, surpassing forecasts of 20.3 and rising 1 point from the previous month. In Germany, the current economic situation gauge declined for the second consecutive month to -76.4, the weakest reading in four months and worse than market expectations of -75, reflecting ongoing strains on the economy. ZEW President Achim Wambach cited continued uncertainty from U.S. tariff policy and Germany’s “autumn of reforms” as key risks, though the outlook improved notably for export-oriented sectors, including automotive, chemical, pharmaceutical, and metal industries, which had previously suffered sharp declines. In the Eurozone, 51.7% of analysts expected no change in economic activity, 37.2% predicted improvement, and 11.1% foresaw deterioration. The current situation index rose 2.4 points to -28.8, while inflation expectations increased 3.3 points to -3.4, suggesting moderate upward pressure on prices. Analysts cautioned, however, that while sentiment is improving, persistent global and domestic uncertainties could limit the sustainability of a broader economic recovery.

We expect German and Eurozone investor sentiment to continue improving in the coming months, supported by stronger export-oriented sectors and stabilising financial indicators, though ongoing global and domestic uncertainties could moderate the pace of recovery.