EU Economy: Weekly Commentary – December 1, 2025

European Market Review

European yields fell, Germany’s curve steepened, stocks rose (Spain 3.47%, Germany 3.23%), euro strengthened, and Brent crude dropped amid peace optimism and oversupply concerns.

Last week, European bond yields generally declined. In Germany, where rising debt levels are increasingly being priced into the market, the yield curve steepened significantly: the 30-year/2-year spread widened to 64 basis points, reaching its highest level since 2019. European stock markets closed the week higher, led by gains in Spain (3.47%) and Germany (3.23%). The euro appreciated 0.73% against the US dollar. Brent crude fell 0.30%, driven by optimism over a potential peace agreement between Russia and Ukraine, which could facilitate increased supply. Brent crude has posted a fourth straight monthly decline, its longest since 2023, amid growing expectations of a global oversupply.

Europe View Synopsis

Eurozone sentiment rises slightly on services and construction. Germany’s stagnation, weak manufacturing, and structural challenges limit growth. Fiscal stimulus offers only delayed optimism.

Eurozone economic sentiment edged up to 97 in November, supported by strong services and construction, while manufacturing lagged due to weak orders and export pressures. Consumer confidence remained stable, but selling price expectations rose across sectors, signalling persistent inflation despite falling energy costs. Employment expectations were mixed, with gains in retail and construction offset by declines in services and industry. Overall growth is moderate, with a meaningful boost expected only after Germany’s budgetary stimulus in late 2026. Germany’s Q3 GDP rose just 0.3%, reflecting prolonged stagnation driven by weak private demand, modest investment, and structural headwinds. Labour market improvements were modest; unemployment slightly fell, but recruitment weakened and vacancies remain low. Business sentiment stayed below long-term averages, constrained by political uncertainties and structural challenges. While fiscal stimulus offers cautious optimism, underinvestment and subdued confidence suggest continued stagnation, limiting Germany’s contribution to Eurozone growth.

Eurozone Sentiment

Eurozone sentiment rises modestly; services and construction improve, manufacturing lags. Germany struggles despite €500B stimulus, with growth expected in 2026 if fiscal policies succeed amid structural challenges.

Eurozone economic sentiment is gradually improving, with the European Commission’s economic sentiment indicator rising slightly to 97 in November from 96.8 in October, marking the third consecutive monthly increase. Confidence in the services sector reached its highest level in over a year, supported by strong performance in hospitality, retail, and construction, with construction sentiment now at its strongest since June 2023. Manufacturing continues to lag, as industrial confidence dipped due to dwindling orders, particularly from exports affected by higher US tariffs and a strong euro. At the same time, inventory assessments fell to their lowest since May, potentially setting the stage for higher production early next year. Employment expectations were mixed, improving in retail and construction but declining in services and industry, while overall consumer confidence remained stable. Selling price expectations increased across all sectors, signalling persistent underlying inflation despite falling energy prices that may soon push headline inflation below 2%, and consumers anticipate faster price increases ahead. Household expectations for income and spending growth were broadly stable, with mortgage rates expected to rise, while access to credit tightened slightly. Overall, the Eurozone economy remains on a moderate growth trajectory, with a meaningful uptick expected only after Germany’s budgetary stimulus in the second half of 2026.

Germany’s economy continues to struggle, with the Ifo business climate index slipping to 88.1 in November, well below its long-term average of 97, reflecting stagnating activity and weak expectations. While 2025 began with optimism driven by fiscal policy shifts and large infrastructure and defence investments, progress was tempered by budgetary missteps, political tensions, and a lack of structural reforms. Underspending so far has limited the impact of stimulus measures, but the €500 billion in planned investments leaves room for cautious optimism that the economy could gain momentum in 2026 if policies are effectively executed, even as structural challenges and global competition persist.

We do not expect sentiment to improve in the short term, as the economy remains weak and labour market conditions continue to stagnate.

German GDP

Germany’s Q3 GDP grew just 0.3% YoY, reflecting prolonged stagnation: weak private demand, modest investment, and structural headwinds suggest the economy will remain stuck without fiscal stimulus.

The second estimate of third-quarter GDP shows annual growth of only 0.3% YoY (0.0% QoQ), consistent with a broader trend of near-zero expansion: over the past three years, Germany has recorded only two quarters of positive growth, averaging a 0.1% contraction per quarter since late 2022. The economy’s stagnation is driven largely by weak private demand, with private consumption falling 0.3% quarter-on-quarter and net exports weighing on growth, while government consumption rose 0.8% and corporate investment inched up 0.3% after a 1.1% decline in Q2. Since 2000, government spending has surged more than 60%, compared with just 15% growth in capital investment, contributing to overall GDP growth of slightly over 30%. Structural challenges and cyclical headwinds have created the longest period of stagnation since World War II, with industrial job losses and mounting pressure on social security systems highlighting the real-world costs. Traditional indicators such as the PMI, which has remained above 50 since summer, no longer reliably signal expansion, and with fiscal stimulus yet to take effect, ongoing external pressures—including tariffs, a stronger euro, and political uncertainty—suggest that the economy will remain stuck in stagnation through the final quarter of 2025.

We believe the German economy will continue to be a drag, along with France, on Eurozone growth. Germany has become stagnant, a traditional and now uncompetitive economy.

German Labour Market

Germany’s labour market improved modestly in November, with unemployment slightly down, but structural challenges, weak recruitment, and subdued consumption suggest that gradual deterioration will continue.

The German labour market showed modest improvement in November, avoiding a worst-case scenario, though a clear turning point remains distant. Unemployment declined by 25,700 to 2.885 million, while seasonally adjusted figures edged up by 1,000, keeping the unemployment rate steady at 6.3%. This outcome offers some relief after concerns that emerged when unemployment surpassed the symbolic three-million mark in August, yet it remains roughly half a million higher than its May 2022 low of 2.2 million, reflecting prolonged economic stagnation and structural challenges across key industries. Recruitment in manufacturing and services has weakened, and vacancies have fallen to pandemic-era levels, though social media and other hiring indicators suggest tentative stabilization. Concurrently, announcements of potential cost-cutting measures and rising bankruptcies in automotive and other sectors underscore lingering risks. Coupled with political uncertainty over pensions and subdued private consumption—illustrated by a 0.3% drop in October retail sales despite nearly 3% annual real wage growth and a savings rate nearing pre-pandemic levels—the data indicate that gradual labour market deterioration is likely to continue, complicating prospects for an economic rebound.

We expect the labour market to remain under pressure, as the manufacturing sector will refrain from hiring due to weakness, and the automotive industry is facing numerous problems.