European government bond prices gained as yields rose, with eurozone bonds affected. Stock markets declined, except Portugal. The euro appreciated, while Brent crude prices surged.

Government bond prices in Europe experienced gains. The rise in yields following the announcement of Germany’s substantial fiscal package not only increased German government bond yields but also triggered a broader surge in Eurozone yields, including in Italy, France, Spain, and others. Stock markets posted negative results, with the exception of Portugal, which rose just over 1.50%. The euro appreciated by 0.16% against the dollar. Brent crude oil prices rose 2.07%, supported by a 3.3-million-barrel drop in US crude inventories. Additionally, President Trump’s threat to impose tariffs on countries importing Venezuelan crude oil has led to a slowdown in shipments from Venezuelan ports, further limiting global supply.

Eurozone shows cautious optimism with manufacturing growth, while Germany faces labour market challenges, limiting recovery. Modest growth is expected in the second half of 2025.

The March Eurozone PMI indicates a modest improvement, rising to 50.4 from 50.2, reflecting cautious optimism despite external pressures like potential US tariffs. Manufacturing output saw a notable rise to 50.7, its highest in two and a half years, signalling optimism despite trade war concerns. However, external demand remains under pressure, limiting short-term growth. The services sector is less affected by trade tensions, though subdued consumer confidence hampers growth. Easing price pressures complicates the ECB's decisions. In Germany, the labour market weakens with rising unemployment, declining vacancies, and increasing bankruptcies, dampening private consumption recovery. Consumer confidence remains low, and the outlook remains weak due to falling job opportunities. However, labour shortages may prevent a sharp decline. Meanwhile, Germany’s Ifo index shows signs of recovery, driven by fiscal stimulus, particularly in infrastructure investment. Despite positive shifts, growth remains modest, with structural reforms needed for long-term recovery. A gradual rebound is expected in the second half of 2025

March Eurozone PMI shows modest improvement, with manufacturing output rising. However, external demand pressure, geopolitical uncertainties, and looming tariffs create a cautious short-term outlook.

The Eurozone PMI for March shows a modest improvement, rising to 50.4 from 50.2 in February, signalling cautious optimism among businesses ahead of potential new US tariffs. The manufacturing output PMI notably surged to 50.7, its highest level in two and a half years, from 48.9 in February, reflecting optimism despite concerns over a potential escalation in the trade war. This improvement suggests that GDP growth for the first quarter is likely to show a positive print following stagnation at the end of last year. However, external demand remains under pressure, and with more tariffs looming, the short-term outlook remains constrained. The rise in manufacturing output, fuelled by expectations of increased defence and infrastructure investments, is tempered by the continued contraction in new orders, although the pace of decline is slowing. The services sector is less affected by trade tensions, yet consumer confidence remains subdued due to geopolitical uncertainties, limiting growth potential. Price pressures eased in March, adding complexity to the European Central Bank’s decision-making as it weighs whether to pause or continue its easing cycle amid ongoing uncertainty. While the PMI signals modest growth and easing inflation, the economic landscape could shift significantly depending on the actions taken regarding US tariffs and potential European retaliation.

We expect a slight recovery in the second half of the year, driven by increased defence and infrastructure investment.

Germany’s labour market continues to weaken, with rising unemployment, declining vacancies, and increased bankruptcies, limiting private consumption recovery as cautious consumers prioritize saving amid economic uncertainty.

Germany’s labour market continues to weaken, casting doubts on any near-term recovery in private consumption. In March, unemployment fell by 22,100 to 2.967 million, but this decline reflects statistical effects rather than strength, marking the weakest March performance since the financial crisis. Seasonally adjusted, unemployment rose by 26,000, pushing the rate to 6.3% from 6.2% in February. Since 2022, the labour market has been undergoing a gradual soft landing, with unemployment rising from 2.2 million in May 2022 to nearly 3 million, while vacancies have declined since late 2021. Employment growth, driven largely by migration, has primarily been in part-time and low-wage positions, failing to boost private consumption. The outlook remains subdued, as recruitment plans in industry and services continue to decline, and potential cost-cutting measures in key sectors, including automotive, signal further job losses over time. Additionally, rising corporate bankruptcies—up by low double-digit percentages since mid-2023—further threaten employment. However, demographic trends and ongoing labour shortages may prevent a sharp deterioration. Despite a recent fiscal policy shift, consumer confidence remains weak, with Germans prioritizing precautionary saving amid labour market concerns rather than responding to political developments.

We anticipate that Germany’s labour market will weaken further, with rising unemployment and declining job opportunities, which will continue to weigh on consumer confidence and spending. Stimulus measures could drive higher demand for workers in key sectors like construction and industry.

Germany's economy shows signs of recovery, with the Ifo index rising, driven by fiscal stimulus. Growth remains modest, and long-term recovery depends on structural reforms.

The German economy is showing early signs of recovery, as indicated by the latest Ifo Business Climate Index, which rose to 86.7 in March from 85.2 in February, marking its highest level since July of the previous year. This increase reflects a notable rise in business expectations, which surged to 87.7, while the current conditions index improved slightly to 85.7. Despite these positive shifts, the overall economic sentiment remains subdued, with the effects of the newly agreed fiscal stimulus package not yet fully realized and concerns about the upcoming US tariffs still looming. The fiscal stimulus package is expected to provide a much-needed boost to the economy, particularly through infrastructure investment, which could trigger a cyclical upswing. However, while infrastructure investment is vital for modernizing Germany’s economy, it will not be enough to address broader challenges related to competitiveness, sectoral transformation, or innovation. The Ifo index data suggests that Germany’s economy may have bottomed out in the first quarter of the year, with only modest growth expected in Q1 at just 0.1% QoQ. Although a gradual recovery seems likely throughout 2025, the timing and sustainability of this rebound depend heavily on the outcome of ongoing coalition talks. The success of these talks and the subsequent implementation of structural reforms will ultimately determine whether the cyclical recovery can evolve into a more durable, long-term improvement.

We expect a modest recovery in the second half of the year, although the economy will remain plagued by structural issues and entrenched in a traditional economic model.