EU Economy: Weekly Commentary – March 2, 2026

European Market Review

Eurozone bond yields fell. European equities rose, with Portugal leading. Euro strengthened. Brent crude surged 2.13% on U.S.-Iran nuclear talks collapse. Concerns over Middle East supply and geopolitical risk rose.

Eurozone bond yields declined last week. The 10-year French-German spread stands at 56.5 basis points, while the 10-year German-Italian spread remains close to 62.6 basis points. European equity markets advanced, although Belgium’s benchmark index fell more than 3.5%, with Portugal leading gains at over 2%. The euro appreciated 0.28% against the U.S. dollar. Brent crude rose 2.13%, following the collapse of extended nuclear negotiations between the United States and Iran. The failure to reach an agreement has intensified concerns about potential sanctions or military action that could disrupt Middle Eastern oil supply, particularly via the Strait of Hormuz, which channels roughly 20% of global oil flows. Heightened geopolitical risk prompted traders to price in supply uncertainties, driving crude to multi-month highs.

Europe View Synopsis

Eurozone sentiment stays positive despite February’s dip, supported by robust manufacturing, stable household credit, modest corporate borrowing, and public investment. German and French inflation remains moderate, growth steady.

Eurozone economic sentiment remains resilient despite a modest February dip, with the European Commission’s indicator easing to 98.3 from January’s near three-year high. Softer services expectations drove the decline, yet manufacturing remains robust, supported by stronger production outlooks and improving order books. The economy expanded by 0.3% in both Q3 and Q4 2025, highlighting steady momentum despite global headwinds. Household lending growth held at 3.0% YoY, while corporate credit eased slightly to 2.8%, suggesting only mild caution. Public investment continues to underpin activity, supporting a cautiously optimistic 2026 outlook. Germany’s labour market shows mixed trends: unemployment fell in February but remains above 3 million, with vacancies declining and structural pressures persisting. Inflation eased to 1.9%, though core pressures remain sticky. In France, inflation rose to 1.0% due to energy base effects, while broader price pressures stay moderate. Overall, Eurozone fundamentals remain stable, with growth and inflation expected to hover around current levels through 2026.

Eurozone Sentiment

Eurozone sentiment remains positive despite February’s dip, with resilient manufacturing, steady household lending, modest corporate borrowing, and ongoing public investment. Supporting a cautious yet optimistic economic outlook for 2026.

Eurozone economic sentiment remains resilient despite a modest pullback in February, with the European Commission’s economic sentiment indicator registering 98.3, down from January’s nearly three-year peak of 99.3. The slight decline primarily reflects more cautious expectations within the service sector, where recent softer demand and subdued forecasts for output and employment have tempered optimism. Nevertheless, broader sentiment continues to point to a positive economic trajectory, supported by robust manufacturing production expectations, improving order books, and ongoing public investment initiatives. The Eurozone economy has maintained a steady growth pace in recent quarters, recording 0.3% expansion in both Q3 and Q4 of 2025, despite global economic headwinds. Banking sector data from the European Central Bank further underscore this supportive backdrop: lending to households remained stable at 3.0% YoY, reflecting continued resilience in consumer credit demand, while credit to non-financial corporations eased slightly to 2.8%, indicative of a modest softening in corporate borrowing that could prove temporary given historical monthly volatility. Overall, these factors suggest that while the path of growth through 2026 is unlikely to be linear or marked by a sharp rebound, Eurozone economic fundamentals remain solid, with steady investment and credit conditions underpinning a cautiously optimistic outlook for the year ahead.

We expect that Eurozone economic sentiment will remain broadly positive throughout 2026, supported by resilient manufacturing, stable household credit, modest corporate borrowing, and ongoing public investment, despite short-term caution in the service sector.

German Labour Market

Germany’s labour market showed mixed signals in February. Unemployment fell by 14,700 but remains above 3 million. Employment declines continue amid structural shifts, vacancies drop, recovery expected year-end.

Germany’s labour market sent mixed signals in February. Unemployment fell by 14,700, marking the strongest February performance since 2022, yet the total number of unemployed remains above the politically sensitive 3 million threshold, and the seasonally adjusted rate held steady at 6.3%. Over the past four years, unemployment has risen by roughly 500,000, reflecting stagnating GDP growth, structural headwinds in manufacturing, and a gradual shift in the service sector. Employment has been declining since last summer, driven by demographic pressures, sectoral and regional realignments linked to the energy and industrial transition, and higher entry barriers for graduates amid growing AI adoption. Job vacancies have continued to fall, signalling subdued hiring momentum, while cost-cutting measures and a rise in corporate insolvencies, particularly in automotive and traditional industrial sectors, point to further labour market strain before conditions improve. If the German economy experiences a cyclical recovery in the coming months, the labour market is expected to stabilise towards the end of the year, though structural shifts suggest long-term adaptation will be required across industries.

We expect Germany’s labour market to recover gradually. Investment in infrastructure and defence should support improvement.

Inflation

German inflation fell to 1.9% YoY in February. French inflation rose to 1.0% YoY. Energy drove changes. Core and services remained stable.

German inflation fell to 1.9% YoY in February, down from 2.1% in January, slipping below the ECB’s 2% target. The decline was driven by lower energy prices (-1.9% YoY) and slower food inflation (1.1% YoY). On a month-on-month (MoM) basis, headline prices edged up modestly, reflecting subdued momentum at the start of the year. Despite the easing in headline inflation, core inflation remained sticky at 2.5% YoY, while services inflation held at 3.2% YoY, highlighting persistent domestic cost pressures, particularly in labour-intensive sectors. Regional data indicate that falling food prices and favourable energy base effects were the main contributors to the YoY deceleration, partially offset by rising costs for clothing and footwear. Looking at individual categories, housing-related costs and transportation services remained elevated, adding to the underlying stickiness of domestic inflation.

French inflation rose to 1.0% YoY (1.1% harmonised) in February, up from 0.3% in January, slightly exceeding expectations. The increase was primarily due to energy base effects, as last year’s 15% cut in regulated gas tariffs fell out of the calculation, while modest increases in global energy prices pushed energy inflation from -7.6% to -3% YoY. On a MoM basis, headline prices showed moderate gains, mainly from energy and seasonal factors. Other price pressures remained contained: services inflation inched up to 1.8% YoY, while manufactured goods continued to decline, though at a slower pace due to timing shifts in sales periods. The labour market remained steady, supporting economic resilience, and limiting broader inflationary pressures.

We expect inflation in both Germany and France to hover around current levels in the coming months, with disinflationary effects from a stronger euro and softer import prices broadly offsetting renewed upward pressure from higher oil and fuel costs, keeping overall price pressures moderate.