EU Economy: Weekly Commentary – September 29, 2025

European Market Review

European bonds fell as German-French spreads widened. Stocks rose, led by Portugal. Euro weakened. Brent crude gained on U.S. inventory drops, geopolitical tensions, and export uncertainties.

European bond markets dropped during the week. The yield spread between German and French 10-year bonds widened to 82.8 basis points. France’s average credit rating remains seven notches above “junk,” a level that appears generous given the country’s substantial budget deficits, debt-to-GDP ratio exceeding 100%, and growing political uncertainty. European equities closed higher, led by Portugal with a 3.23% gain, followed by Italy, which rose 0.8%. The euro depreciated 0.35% against the U.S. dollar. In commodities, Brent crude advanced 3.24%, supported by an unexpected decline in U.S. inventories, geopolitical tensions including Ukrainian strikes on Russian facilities, and ongoing uncertainties surrounding oil exports from Venezuela, Iraq, and Iran.

Europe View Synopsis

Eurozone growth remained steady in September as services offset weak manufacturing. Germany led expansion, France lagged, and subdued business sentiment and structural challenges are expected to weigh on EU growth until 2026.

Eurozone growth held steady in September, with services offsetting weaker manufacturing. The composite PMI rose slightly from 51.0 to 51.2, supported by continued strength in the services sector, while manufacturing activity slipped to a three-month low. Germany led the expansion, with its composite PMI climbing to 52.4, the fastest in 16 months, driven by a strong rebound in services at 52.5 compared with 49.3 in August, even as manufacturing declined further to 48.5 from 49.8. France recorded its weakest performance since April, with both manufacturing at 48.1 and services at 48.9 contracting. Political uncertainty, strikes, weak demand, and subdued household spending weighed on private sector activity. Inflationary pressures remain contained, with input costs easing, wages muted, and consumer prices stable near the ECB’s 2% target. The Eurozone economy remains reliant on resilient services while manufacturing weakness continues. German business sentiment fell as the Ifo index dropped to 87.7, reflecting tariffs, a stronger euro, political uncertainty, and limited reforms, with growth expected to remain subdued until at least 2026, weighing on EU expansion alongside France.

Business Activity

Eurozone growth held steady in September as services offset manufacturing weakness. Germany outperformed with faster expansion, while France lagged amid political uncertainty, weak demand, strikes, and subdued consumer spending, highlighting persistent economic vulnerabilities.

The Eurozone economy sustained a modest pace of expansion in September, with the composite PMI rising slightly from 51.0 to 51.2, underpinned by continued strength in the services sector despite renewed weakness in manufacturing. Germany provided the principal support, as its composite PMI climbed to 52.4, the fastest growth in 16 months, driven by a strong rebound in services activity (52.5 versus 49.3 in August), even as manufacturing declined further (48.5 versus 49.8). France, by contrast, registered its weakest performance since April, with both manufacturing (48.1 versus 50.4) and services (48.9 versus 49.8) contracting. The deterioration in France reflects not only fragile demand and weakening business confidence but also heightened political uncertainty, persistent strikes and protests, and pressure on household spending, all of which are weighing on private sector activity. At the Eurozone level, manufacturing activity fell to a three-month low, while services expansion helped sustain overall growth momentum. Inflationary pressures remain contained, as surveys point to easing input costs, muted wage dynamics, and stable consumer prices near the European Central Bank’s 2% target, reducing the likelihood of policy intervention. Nevertheless, falling new orders and rising operating costs highlight persistent vulnerabilities, particularly in the industrial sector, underscoring the dependence of near-term growth on the resilience of services activity.

We expect Eurozone services to remain stable, supporting modest growth, but ongoing weakness in manufacturing could increasingly weigh on overall economic expansion.

German Business Sentiment

German business optimism fell as the Ifo index dropped to 87.7, reflecting US tariffs, a stronger euro, political uncertainty, limited reforms, and stagnation until at least 2026.

German business optimism has sharply retreated as the Ifo Business Climate Index unexpectedly fell to 87.7 in September from 88.9 in August, with the expectations component dropping particularly steeply, highlighting renewed doubts about the country’s economic trajectory. After six months of steady gains, this decline reflects the combined impact of external pressures, including US tariffs, a stronger euro, and the uneven effects of the US front-loading of exports, as well as domestic political challenges that have dampened hopes that fiscal stimulus and growth-enhancing reforms could lift the economy out of stagnation. Although the government has announced a substantial €500 billion fiscal stimulus package targeting infrastructure and defence, debates over possible austerity measures, the reallocation of previously planned investments into special funds, and the perception of creative accounting risk, undermining household and corporate confidence, potentially delaying spending and investment. Moreover, structural reforms to boost long-term competitiveness remain limited, with Chancellor Friedrich Merz promising a “Fall of reforms” but so far offering little concrete plan to modernise Germany’s economic model for the 21st century. Consequently, despite resilience in the Composite PMI and temporary gains from inventory cycle adjustments, meaningful growth is unlikely before 2026, making the Ifo decline a stark reminder that optimism can quickly evaporate and that Germany faces yet another year of stagnation unless decisive reforms are implemented.

We expect the German economy to remain largely steady in 2025, exerting pressure on EU growth, alongside France, where economic performance is among the weakest in the bloc.