EU Economy: Weekly Commentary – September 8, 2025

European Market Review

European bond yields hit multi-decade highs last week amid inflation and debt concerns. Equities fell, the euro rose, and Brent crude dropped on higher supply and OPEC+ outlook.

European bond markets saw a broad increase in prices. Long-term government bond yields, however, reached multi-decade highs last week amid inflation and debt concerns. France’s 30-year yield climbed to 4.5%, the highest since 2009. Germany’s 30-year rose to 3.4%, the highest since 2011. The Netherlands reached 3.57%, and the UK 5.69%, its highest since 1998. Even traditionally safe-haven German bonds are under pressure from planned defence and infrastructure spending. Stronger-than-expected August inflation increases the likelihood that the ECB will maintain rates, fuelling a cycle of rising yields and fiscal strain. European equities fell again, with Italy and Germany leading losses at 1.39% and 1.28%, respectively. The euro appreciated 0.28% against the US dollar. Brent crude fell 2.65%, driven by rising US inventories and potential OPEC+ production increases, signalling higher supply amid ongoing geopolitical uncertainties.

Europe View Synopsis

Eurozone inflation stays near 2%, labour market remains resilient, manufacturing rebounds, services subdued, supporting steady ECB rates.

Eurozone inflation remains close to 2%, with headline inflation at 2.1% in August and core inflation steady at 2.3%, supported by stable energy prices and moderated consumer expectations. Wage growth is easing, with the ECB’s forward-looking tracker projecting around 2.5% by March 2026, limiting future inflation pressures. The resilient labour market saw unemployment fall to 6.2%, driven by Italy, while hiring intentions remain strong across the region, underpinning moderate, sustained economic growth. Business activity showed modest expansion in August, with the overall activity index at 51.0. Manufacturing rebounded strongly, reaching a 41-month high in output, supported by domestic orders, though exports continued to decline. Service sector growth remained subdued, though employment in services rose to a 14-month high. Nationally, Spain and Italy led expansion, while France lagged slightly. Overall, the Eurozone shows gradual but steady economic improvement, with inflation near target and the labour market resilient, supporting expectations that the ECB will maintain current policy rates in the near term.

Inflation

Eurozone inflation remains stable near 2%, with moderate wage growth, a resilient labour market, and steady energy prices, supporting ECB’s likely decision to hold rates amid global risks.

Eurozone inflation remains largely stable ahead of the September ECB meeting, with headline inflation rising slightly from 2% to 2.1% in August, largely due to slower declines in energy prices, while core inflation held steady at 2.3%, signalling a stable underlying inflation environment despite persistent global economic uncertainties. Services inflation edged down to 3.1%, goods inflation remained at 0.8%, and energy prices have stayed relatively contained, partly supported by favourable exchange rate developments. Consumer inflation expectations have moderated to 2.5%, down from spring levels, while the labour market continues to demonstrate resilience, with unemployment declining to 6.2% and wage growth showing signs of moderation. Negotiated wage increases are influenced by one-off effects, but the ECB’s forward-looking wage tracker (excluding these effects) anticipates further easing, projecting wage growth around 2.5% by March 2026, which may temper future inflation pressures. Overall, inflation remains close to the ECB’s 2% target and is expected to stay near target in the medium term according to June staff projections. The economy shows modest improvement, with neutral interest rates providing a supportive backdrop, making a case for the ECB to hold policy steady. However, with slow growth, lingering downside risks, and expectations of further rate cuts from the Federal Reserve, dovish members of the governing council may still advocate for one additional rate reduction before settling on a steady path, though the case for maintaining current rates is now notably robust.

We expect Eurozone inflation to remain steady around 2%, with no further ECB rate cuts anticipated until the end of the year. Following the next cut, we expect that rate to become the new neutral.

Labour Market

Eurozone unemployment fell to 6.2%, driven by Italy’s decline to 6.0%. Strong hiring intentions and steady labour markets support expectations of moderate, resilient economic growth despite global uncertainties.

Eurozone unemployment has once again edged down to 6.2%, underscoring the resilience of the region’s labour market in the face of ongoing global uncertainties. The overall rate declined from 6.4% in June to 6.2% in July, driven primarily by a reduction in Italian unemployment from 6.2% to 6.0%, while rates in major economies, including Germany, France, Spain, and the Netherlands, remained broadly stable. Smaller markets exhibited mixed trends, with declines in Belgium and Austria offset by increases in Ireland and Finland. The persistence of unemployment at historically low levels in recent months reflects sustained labour market strength despite external pressures. Concurrently, business hiring intentions across the Eurozone are on the rise, signalling robust labour demand and suggesting continued resilience in employment conditions. Taken together with modest improvements in economic indicators and steady domestic consumption, these developments support expectations for moderate, sustained economic growth in the Eurozone, notwithstanding ongoing global risks.

We expect the Eurozone labour market to remain broadly stable, yet subject to uncertainty, as ongoing domestic challenges and external pressures continue to influence employment dynamics.

Business Activity

In August 2025, the Eurozone economy expanded modestly. Growth was driven by strong manufacturing activity. Service employment rose. Services remained subdued. Export demand continued to decline.

The Eurozone economy continued to expand at a modest pace, with the overall activity index rising slightly to 51.0 from 50.9 in July. Growth in the services sector remained subdued, with the services activity index declining to 50.5 from 51.0, reflecting only marginal increases in output and demand. In contrast, the manufacturing sector experienced a marked recovery, with the Eurozone Manufacturing PMI climbing to 50.7 from 49.8 and the Manufacturing Output Index reaching 52.5, a 41-month high and the fastest rise in factory production since March 2022. This rebound was supported by a renewed increase in domestic new orders, the first in nearly three-and-a-half years, while export orders continued to contract for the second consecutive month. Manufacturers also reduced backlogs and inventories at accelerated rates, scaled back purchasing activity, and faced continued supplier delays. Employment trends diverged across sectors: service sector hiring strengthened to a 14-month high, whereas manufacturing employment contracted marginally. Input cost inflation accelerated, contributing to higher prices for goods and services, despite slight price reductions in manufacturing. At the national level, Spain led Eurozone growth with an activity index of 53.7, followed by Italy at 51.7, Ireland at 51.3, Germany at 50.5, while France remained just below the 50.0 no-change threshold at 49.8. Overall, the data indicate a gradual but sustained expansion in the Eurozone, underpinned by strong manufacturing momentum and rising employment in services, though weaker service sector performance and persistent export declines continue to moderate broader economic prospects.

We expect this gradual expansion to persist, supported by manufacturing momentum and steady hiring, though subdued service sector growth and weak exports may continue amid uncertain external economic conditions.