EU Economy: Weekly Commentary – July 28, 2025

European Market Review

European yields rose except France; UK bonds lead G7. Equities mixed, euro up. Oil fell on weak demand, oversupply fears, US-China slowdown, and OPEC+ output plans.

European bond markets experienced a broad rise in yields over the week, with France as the notable exception. This led to a widening of the spread between German and French 10-year bonds to 67.2 basis points. UK 10-year yields remain the highest among the G7 at 4.6–4.63%, compared to 2.6–3.6% in Germany, France, Italy, and Canada, 4.4% in the US, and significantly lower levels of 1.5–2.9% in Japan, China, and Korea, reflecting the UK’s ongoing challenges with inflation control and elevated fiscal spending. European equity performance was mixed: Spain led with gains of nearly 2%, while Germany declined by 0.30%. The euro strengthened 1.00% against the US dollar. Brent crude prices fell 2.35%, driven by weak demand signals from the US and China, ongoing concerns over global oversupply, and potential additional supply from Venezuela and Iran, as Chevron and others prepare to resume limited operations and diplomatic negotiations progress. These developments come alongside an unexpected drop in US capital goods orders, continued tax revenue declines in China, and OPEC+ maintaining its production-increase plans to regain market share, further reinforcing downward pressure on oil prices.

Europe View Synopsis

The ECB held rates steady, signalling data dependence amid easing inflation. Business sentiment is improving, especially in Germany, but weak growth suggests 2025 may remain a stagflationary year.

The ECB kept its deposit rate unchanged at 2% in July, maintaining a data-dependent stance and signalling flexibility amid easing inflation and persistent uncertainty. While core and services inflation remain above target, wage pressures are slowing, and domestic price dynamics are gradually improving. The ECB’s cautious tone leaves room for a possible rate cut in September, contingent on upcoming data, especially as inflation trends lower and economic momentum stays subdued. Eurozone business activity showed modest improvement in July, with the composite PMI rising to 51, led by a rebound in services and steady employment, though manufacturing remains fragile with declining new orders. Inflation pressures remain muted, supporting the case for further policy easing. In Germany, business sentiment rose for the seventh month, driven by fiscal stimulus, energy price relief, and improved corporate outlooks, despite continued weak growth and soft consumer confidence. While optimism is returning, the broader economic picture remains fragile. We expect one more rate cut after the summer and a modest rebound in activity, but overall, 2025 is likely to be a stagflationary year for the Eurozone.

ECB Rates Decision

The ECB held rates at 2%, emphasised a data-dependent approach, acknowledged easing inflation pressures, avoided committing to a preset path, and left the door open for a possible cut in September.

The European Central Bank held its key deposit rate steady at 2%, in line with expectations, following a cumulative 200 basis points of cuts since September 2023. Reaffirming its data-dependent, meeting-by-meeting approach, the ECB avoided any forward guidance on the future rate path, citing elevated uncertainty and the need for flexibility. The Governing Council noted that domestic price pressures are gradually easing, with wage growth showing signs of deceleration, although core and services inflation remain above 2%, supported by resilient demand and fiscal stimulus across key Eurozone economies such as Germany. The broader Eurozone economy has demonstrated overall resilience, but the ECB continues to monitor downside risks, including heightened geopolitical tensions, volatile financial markets, and unresolved US-EU trade negotiations. At the press conference, President Christine Lagarde reiterated the ECB’s focus on the medium-term inflation outlook, emphasising that the current stance allows room to wait for clearer signals on inflation dynamics and the strength of monetary policy transmission. Although the threshold for additional rate cuts appears higher, one final reduction in September remains a possibility, especially if upcoming inflation prints fall short of expectations or if hard macroeconomic data deteriorate over the summer. Notably, the ECB’s June staff projections still imply a terminal deposit rate of 1.75%, keeping the door open to further policy adjustment if warranted. Markets responded calmly to the announcement, with bond yields little changed and the euro remaining stable, reflecting investor confidence in the ECB’s cautious but measured approach to balancing inflation control with support for growth.

We anticipate one further rate reduction following the summer period, reflecting subdued economic momentum and inflation converging toward target. This is expected to bring monetary policy close to its neutral stance.

Business Activity

Eurozone PMI data shows modest growth in July, driven by a rebound in services and stable employment, despite ongoing global uncertainties. Manufacturing remains fragile with declining new orders. Inflation pressures are subdued. Germany’s growth is marginal.

The latest Purchasing Managers' Index (PMI) data presents a cautiously constructive outlook for the Eurozone economy, which appears to be regaining momentum despite persistent global uncertainties. In July, the composite PMI edged up from 50.6 to 51, signalling modest expansion following a lacklustre second quarter. While the improvement is incremental, it is notable within the broader context of geopolitical tensions, softening global trade, and the ongoing impact of restrictive monetary policy. The services sector was a key contributor to this positive shift, with the services PMI rising to 51.2 in July from 50.5 in June, reversing earlier signs of weakening demand and output. Encouragingly, sentiment in the sector stabilized in June and turned decisively positive in July, with activity expanding once again. Given that services constitute the largest component of the Eurozone economy, this recovery is particularly important for third quarter growth prospects. Although recent PMI data suggests a modest recovery in manufacturing output, the decline in new orders in July raises questions about the sector’s underlying resilience. On the inflation front, price pressures remained subdued across both goods and services, aligning with an economy that is expanding at a moderate pace without overheating. Meanwhile, continued growth in employment demand adds to the overall picture of a stable, albeit cautious, economic environment. Germany, the largest economy in the bloc, posted only marginal growth in business activity, with the flash composite PMI dipping slightly to 50.3 from 50.4 in June. Manufacturing continues to face headwinds, as performance remains uneven and sensitive to volatile trade conditions, particularly in relation to the United States. Against this backdrop, the European Central Bank is unlikely to revise its monetary policy stance based on the current data alone.

We expect a modest rebound in manufacturing and services, though uncertainties remain due to ongoing trade tensions, geopolitical conflicts, and political instability affecting the outlook.

German Sentiment

Germany’s business sentiment improves for a seventh month, driven by fiscal stimulus and optimism, despite weak growth, trade risks, and declining consumer confidence.

Germany’s economy is experiencing a surprising resurgence in business sentiment, as reflected in the July Ifo Business Climate Index, which rose for the seventh consecutive month to 88.6, its highest level since last summer, despite ongoing economic challenges such as trade tensions, potential US tariffs and a weakening euro. While this marginal increase from 88.4 in June fell short of expectations, it underscores a notable wave of optimism among German businesses, largely driven by improved assessments of current conditions rather than future expectations. This sentiment boost comes in the wake of fiscal stimulus measures, falling energy prices and a long-awaited turnaround in the inventory cycle. The new German government’s stability and consistent policy delivery, particularly its €500bn infrastructure plan and the recent 'Made for Germany' initiative pledging €631bn in investment, of which €100bn is new, have further reinforced business confidence. However, underlying growth remains weak, with Capital Economics warning that current survey data still aligns with a GDP contraction based on historical patterns. Moreover, the optimism remains largely corporate, as consumer confidence continues to decline. While Germany’s deep fiscal reserves have allowed it to support the economy without imposing austerity, the absence of a broader structural overhaul raises concerns about long-term competitiveness. Still, compared to the economic malaise at the start of the year, the shift in tone is remarkable, proof perhaps that while money may not buy growth outright, it can certainly buy time and optimism.

We expect a short-term rebound in confidence, driven by fiscal stimulus and improving sentiment, but overall, 2025 is likely to remain a stagflationary year for growth.