EU Economy: Weekly Commentary – July 7, 2025

European Market Review

European markets were mixed: bond spreads fluctuated, equities diverged, the euro strengthened, and oil rebounded amid geopolitical tensions and surprising U.S. inventory data.

European bond markets had a mixed week, with the 10-year yield spread between France and Germany widening above 70 basis points, while Italian 10-year yields fell to 3.449% (-3.29 bps), narrowing their spread with Germany to 90.8 bps. Despite being the Eurozone’s second most indebted country after Greece, Italian yields remained stable thanks to continued support from the European Central Bank and investor confidence that fiscal discipline will be maintained. In the UK, gilt yields rose sharply amid political uncertainty, with 10-year yields jumping 16 bps on Wednesday and 30-year yields briefly exceeding 5.4% before closing at 5.358%. European equity markets were similarly mixed, with Portugal gaining 3.38% and Germany declining over 1%, while the euro strengthened 0.54% against the US dollar. Brent crude oil rebounded 3.27% following the prior week’s decline, driven by Iran’s suspension of cooperation with the UN nuclear watchdog and a new US-Vietnam trade agreement, though a surprise increase in US crude inventories capped further price gains.

Europe View Synopsis

Eurozone inflation hit 2% in June, driven by stable core inflation and cooling energy prices. Unemployment rose slightly, while PMI showed modest growth and steady employment.

In June 2025, Eurozone inflation reached the ECB’s 2% target, driven by stable core inflation at 2.3%, slowing wage growth, and weakening demand, with Germany’s energy and food prices cooling. Services inflation edged up slightly to 3.3%, while goods inflation declined to 0.5%, reflecting subdued consumption. Wage growth is expected to slow to around 3% by year-end, supporting inflation stability. Eurozone unemployment rose marginally to 6.3%, mainly due to Italy’s increase, while Germany’s rate remained stable at 6.2%, amid persistent labour shortages that continue to underpin moderate wage growth above pre-pandemic levels. The Eurozone Composite PMI Output Index rose to 50.6 in June, signalling modest growth and improved business confidence, despite ongoing weakness in new orders and subdued inflation pressures. Key economies showed mixed performances, with Ireland and Spain leading growth and France lagging. Overall, the outlook points to moderate growth supported by stabilised output, steady employment, and cautious optimism, although risks remain from inflation and labour market imbalances.

Inflation

Eurozone inflation hit the ECB’s 2% target in June, driven by stable core inflation, slowing wage growth, weak demand, and Germany’s cooling energy and food prices.

In June, Eurozone inflation aligned precisely with the European Central Bank's (ECB) 2% target, rising marginally due to higher energy prices, while core inflation remained stable at 2.3%. This reflects a broader trend of easing inflationary pressures driven by slowing wage growth and subdued economic activity, which together suggest the possibility of another rate cut this autumn. Services inflation showed a minimal rebound following an unusually low May, with overall services inflation inching up slightly from 3.2% to 3.3%, while goods inflation declined from 0.6% to 0.5%, indicating weak demand despite recent supply chain disruptions. Wage growth has decelerated significantly, expected to settle around 3% by year-end, supporting inflation stabilisation at the ECB’s target alongside improving productivity. Although external risks such as volatile oil prices and potential trade tensions remain, the underlying inflation environment in the Eurozone is expected to remain moderate. In Germany, inflation cooled in June with the overall CPI rate declining from 2.1% in May to 2.0%, precisely meeting the ECB target. This moderation was driven by subdued food price growth, rising only 2% year-on-year, alongside a 3.5% decrease in energy prices, while core inflation edged down slightly from 2.8% to 2.7%, remaining elevated but expected to decrease gradually in the near term as domestic demand and wage pressures ease further.

We expect one more rate cut by the end of the year, establishing a new neutral rate as slowing wage growth and weak demand continue to support stable inflation around the ECB’s target.

Labour market

Eurozone unemployment rose slightly due to Italy, while Germany remained stable; persistent labour shortages support sustained wage growth despite moderating from post-inflation peaks.

The Eurozone unemployment rate rose slightly from 6.2% to 6.3% in May, primarily driven by an uptick in Italy’s unemployment rate, which increased from 6.1% to 6.5%. Despite this volatility, employment outlooks in Italy have remained relatively positive in recent months. In Germany, the unemployment rate remained stable at 6.2% in June, consistent with May’s figures but elevated compared to the previous year, reflecting ongoing economic challenges and a cautious approach to hiring. The German Federal Employment Agency reported a decline in job vacancies to a four-year low alongside an increase in recipients of unemployment benefits, indicating continued labour market pressures despite tentative signs of economic recovery. Southern European labour markets have exhibited relative resilience and are anticipated to maintain this performance in the near term. Across the broader Eurozone, the labour market continues to demonstrate robustness, characterised by persistent and pronounced labour shortages that continue to constrain employers. Although vacancy rates have declined recently, they remain significantly above pre-2018 levels, highlighting sustained tightness in the labour market. Consequently, these enduring labour shortages amid historically low unemployment underpin a wage growth trajectory that, while moderating from the elevated post-inflation peaks, is expected to remain above pre-pandemic norms, reflecting ongoing imbalances between labour supply and demand throughout the Eurozone.

We expect Eurozone labour shortages to persist, supporting sustained wage growth above pre-pandemic levels despite a slight rise in unemployment and moderating post-inflation effects.

Business Activity

Eurozone PMI rose in June, showing modest output and employment growth, improving confidence, stabilised new orders, and varied performance across major economies amid subdued inflation and cautious optimism.

The Eurozone Composite PMI Output Index climbed to 50.6 in June 2025, up from 50.2 in May, reaching a three-month high and signalling modest overall growth. The Services PMI Business Activity Index also improved to 50.5 from 49.7, marking a return to expansion after months of stagnation. This positive momentum reflects the sixth consecutive month of rising output and a fourth month of employment growth across the Eurozone private sector, despite continued weakness in new business orders, which fell for the 13th straight month but at the slowest rate in recent periods. Among the largest economies, Ireland led with a PMI of 52.8, followed by Spain at 52.1, Italy at 51.1, Germany at 50.4, while France remained in contraction at 49.2. Input price inflation held steady at a six-month low, helped by declining manufacturing costs, although service providers continued to raise charges. Business confidence reached its highest level since July 2024, yet remained below long-term averages. Employment growth was subdued overall, with job losses in the manufacturing sectors of Germany, Italy, and Austria partially offset by sustained hiring in services. The data indicate a gradual stabilisation of output and orders, supported by improving confidence and fiscal stimulus measures in key economies, fostering cautious optimism for moderate Eurozone growth over the coming year.

We expect continued moderate Eurozone growth driven by stabilised output, rising confidence, and steady employment, despite persistent headwinds in new orders and inflation.