European bond prices fell, except in Italy. Chancellor Merz visited Paris, Franco-German ties strengthened, equities rose, the euro weakened, and Brent crude prices increased.

European bond prices declined over the week, with the exception of Italy, where yields fell. Germany’s new Chancellor, Friedrich Merz, visited Paris to reset Franco-German ties and boost EU defence and competitiveness. The yield spread between French and German 10-year bonds remains above 70 basis points. Equity markets saw broad gains, except for France and the UK’s FTSE 100. Italy and Germany led the increases, rising sharply by 2.72% and 1.79%, respectively. The euro weakened slightly, losing 0.48% against the US dollar. In commodities, Brent crude oil prices rose 3.25%, supported by falling inventories, reduced production, geopolitical tensions, and shifting energy policies, all contributing to tighter supply conditions.

Eurozone growth slowed in April amid weak services, flat retail sales, and fragile German industry, reinforcing expectations for further ECB easing amid persistent economic uncertainty.

Eurozone growth slowed in April, driven by a weakening services sector, while business confidence declined, supporting expectations for further ECB monetary easing. The HCOB Composite PMI dipped to 50.4, with services falling sharply and Germany’s activity hitting multi-month lows. France’s composite index also slipped below 50, signalling broader stagnation. Despite easing inflation and resilient wage growth, retail sales remained flat amid ongoing uncertainty and poor consumer sentiment. Real wage gains have not translated into stronger spending, reflecting widespread caution. In Germany, industrial output and factory orders rebounded in March, hinting at a tentative recovery, yet challenges like trade tensions, a strong euro, and logistical disruptions persist. While export demand provided a short-term boost, underlying momentum remains fragile. Overall, the Eurozone faces persistent economic weakness, subdued business activity, and cautious consumer behaviour, reinforcing the need for continued ECB support. Recovery will likely remain gradual, dependent on improved sentiment and global stability.

Eurozone growth slowed in April as services weakened; Germany’s activity hit multi-month lows. Business confidence fell, supporting expectations for further ECB monetary easing.

The HCOB Eurozone Composite PMI dropped to 50.4 in April from 50.9 in March, marking a two-month low and indicating a further slowdown in the region's economic growth. This decline was primarily driven by a sharp deceleration in the services sector, which fell to 50.1 from 51.0—its weakest reading in five months—while manufacturing saw a modest improvement, rising to 50.6 from 50.3. Despite this, manufacturing output remains subdued and insufficient to offset service sector weakness. Forward-looking indicators, including new orders and business expectations, signal further deterioration ahead. In Germany, the final Composite PMI came in at 50.1—revised up from the preliminary 49.7 but still a four-month low—while the Services PMI fell to 49.0 from 50.9 in March, its lowest level in 14 months. The data reflect mounting concerns over trade frictions and economic uncertainty, which are weighing heavily on sentiment. Although Germany’s manufacturing sector showed slight improvement, it remains fragile and exposed to external shocks. France also saw its composite index slip below the 50 threshold (47.8), indicating broader momentum loss across the Eurozone’s core economies. With inflationary pressures continuing to ease, the European Central Bank’s recent rate cut appears increasingly justified, and further monetary easing is likely. As confidence erodes and disinflation risks mount, the burden of supporting the economy will again fall to the ECB, while the impact of fiscal stimulus measures in Germany and across the EU is likely to materialise only gradually.

We expect continued economic weakness, persistent inflationary pressures, and stagnation across the Eurozone, reinforcing the case for further ECB support amid deteriorating business confidence.

Eurozone retail sales remain flat despite rising real wages, as persistent economic uncertainty and weak consumer confidence continue to dampen spending across the region.

Despite a clear recovery in purchasing power across the Eurozone—underpinned by real wage growth consistently exceeding inflation—retail sales have remained largely stagnant since September 2024, with only marginal month-on-month changes and a slight decline of 0.1% in March 2025 compared to February. This subdued retail performance comes in spite of negotiated wage growth holding steadily above 4% since early 2023, while inflation has eased to just over 2%, effectively restoring much of the purchasing power lost in recent years. However, this recovery has not yet translated into increased consumer spending, as elevated levels of economic uncertainty continue to weigh heavily on consumer sentiment. The tentative rebound in retail activity seen in the previous year has lost momentum, with consumer confidence beginning to fall in November—coinciding with the U.S. elections—and dropping further in April amid the intensification of global trade tensions. These developments suggest that, although consumers are in a better financial position, they remain hesitant to make discretionary purchases or significantly increase spending on goods. Looking ahead, the Eurozone retail outlook remains cautious; the broader global economic environment is expected to remain volatile and may continue to deter consumer activity. Nonetheless, if current trends in wage growth persist and inflation stays subdued, there remains the potential for a modest, gradual increase in retail spending in the coming quarters, especially if consumer confidence begins to recover.

We expect that despite rising real wages, economic uncertainty and weak consumer confidence will keep retail sales stagnant in the Eurozone for the foreseeable future.

German industrial production and factory orders rose in March, signalling a tentative recovery, though trade tensions, a strong euro, and logistical challenges continue to pose risks.

German industrial production showed a solid rebound in March, rising 3.0% MoM after a 1.3% contraction in February, signalling a possible stabilisation of the sector despite lingering challenges. Although output remains 0.2% below its level a year ago and still roughly 9% below pre-pandemic levels, recent data suggest the industry may be bottoming out. Export activity also contributed to the stronger performance, with a 1.1% monthly increase driven in part by frontloading ahead of expected U.S. trade tariffs. Nevertheless, risks remain, including the imposition of new tariffs on European goods, a stronger euro acting as a de facto additional trade barrier, and severe logistical disruptions caused by historically low water levels on key German rivers.

Factory orders also improved markedly in March, rising 3.6% MoM and 3.8% YoY. The increase was broad-based, with strong contributions from the electrical equipment sector (+14.5%), capital goods (+3.7%), intermediate goods (+2.5%), and consumer goods (+8.7%). Foreign demand played a significant role, with orders from the euro area up 8.0% and non-euro area countries up 2.8%, while domestic orders increased by 2.0%. Even excluding large-scale contracts, orders were still up 3.2% month-on-month, indicating a genuine underlying momentum. These developments, alongside government plans to boost investment and easing energy costs, offer cautious optimism for a more sustained industrial recovery in the second half of the year.

We expect the overall German economy to face continued stagnation in the near term, as weak industrial momentum, persistent trade tensions, and domestic structural challenges limit growth, despite isolated signs of recovery in production and demand.