European bond yields rose, with France facing fiscal challenges. UK bonds underperformed. Stock markets rose overall. Euro strengthened. Brent crude prices dropped 4.01%.

European bond yields rose throughout the week, with slight declines in France and the UK. France, grappling with a fiscal deficit of 6.2% and political deadlock, faces limited prospects for structural reforms. With significant foreign investment in French bonds, a recession is the last thing France can afford. French bonds remain above Spanish yields and are closely tracking Greek bonds. UK government bonds underperformed all peers, including Greek, Italian, and French bonds, despite France’s fiscal challenges. The stock market increased overall during the week, except in the UK, Portugal, and Italy. The euro strengthened marginally against the dollar, closing at 1.0495. Brent crude prices dropped by 4.01%, driven by President Trump’s comments at the World Economic Forum in Davos, where he indicated plans to encourage Saudi Arabia and other OPEC members to cut oil prices.

The Eurozone shows slight PMI growth. Germany cautiously rebounds. Weak demand, inflation, and political uncertainty hinder robust recovery prospects.

The Eurozone’s composite PMI edged up to 50.2 in January, indicating marginal growth as steady services activity balanced out weak but improving manufacturing. Germany recorded its first expansion in seven months, with a composite PMI of 50.1, driven by gains in both sectors and cautious optimism for recovery. However, international demand remains weak, export orders continue to decline, and the potential for U.S. tariffs adds uncertainty. While domestic demand may support modest growth, economic sentiment in the Eurozone saw a slight uptick, whereas Germany’s sentiment declined due to ongoing recession concerns, inflationary pressures, weak demand, political uncertainty, and limited innovation. As a result, Germany's recovery prospects appear dimmer compared to its neighbours.

The Eurozone PMI improved to 50.2, signalling slight growth amid weak manufacturing and steady services. Germany returned to expansion, with a composite PMI of 50.1, reflecting gains in both sectors and cautious optimism for recovery.

The Eurozone’s composite PMI rose slightly from 49.6 to 50.2 in January, crossing into expansionary territory but still reflecting a stagnant economy. While the manufacturing sector’s output index improved from 44.3 to 46.8, it continues to contract, albeit at a slower pace. The services sector remains the primary growth engine, despite a slight dip in its activity index from 51.6 to 51.4. Weak international demand and declining export orders weigh heavily on growth prospects, compounded by the potential impact of US tariffs. However, increased optimism among manufacturers points to cautious expectations of stronger domestic demand driving modest growth later in the year.

Germany’s composite PMI increased to 50.1 in January, marking its first expansionary reading in seven months. The rebound was driven by significant improvements in both the manufacturing and services sectors, highlighting a gradual economic recovery. Although the manufacturing PMI remains below 50, indicating contraction, the narrowing gap signals progress. The services sector, in particular, continues to bolster overall growth, underscoring the economy’s ongoing structural shift. German businesses are cautiously optimistic, anticipating improved conditions later in the year, primarily supported by stronger domestic demand.

We anticipate the sector will remain stable with minimal changes, contingent on potential political actions by Trump.

Germany's economic sentiment declined due to recession, negative GDP growth, inflation, and weak demand, while Eurozone sentiment improved slightly.

The ZEW indicator of economic sentiment for Germany declined in the January 2025 survey, falling to 10.3 points, a decrease of 5.4 points from the previous month. Despite this drop, the assessment of the current economic situation showed a slight improvement, increasing by 2.7 points to -90.4. The decline in economic expectations is primarily attributed to negative GDP growth, rising inflationary pressures, low private household spending, and subdued demand in the construction sector. Should these trends persist, Germany may continue to fall behind other Eurozone countries. Additionally, heightened political uncertainty, stemming from challenges in coalition-building and the unpredictable economic policies under the new U.S. administration, further exacerbates the outlook. In contrast, sentiment regarding the Eurozone’s economic development was more positive, with the indicator rising by 1.0 points to 18.0, while the assessment of the current economic situation remained stable at -53.8 points.

With the uncertainty surrounding U.S. policies, persistent inflation, and sluggish growth, we believe Germany's recovery remains a distant prospect. The economy remains rooted in a traditional model, constrained by limited innovation and an overreliance on external factors, which undermine its adaptability to global economic challenges.