European bonds declined with speculation on a 50-year bond issuance. Stock markets rose, led by Germany, while the euro weakened and Brent crude prices fell.

European bond prices declined over the week. Speculation emerged regarding Germany’s potential issuance of a 50-year bond to address rising debt, leading to a rise in long-term EUR swap yields. As a result, the spread between 50-year and 30-year swaps widened to a multi-year high. The Deutsche Finanzagentur is expected to significantly ramp up bond issuance next year, possibly including new 20-year or 50-year Bunds. On the equity front, stock markets experienced solid gains, with Germany outperforming other markets once again, rising 4.63%. The euro weakened slightly, losing 0.51% against the US dollar. In the commodity market, Brent crude oil prices dropped 6.65%, driven by signals from Saudi Arabia suggesting a tolerance for lower prices, along with expectations of higher OPEC+ supply and weaker global demand due to economic slowdown.

Eurozone GDP grew 0.4% in Q1 2025, but weak sentiment, rising core inflation, and trade tensions cloud the outlook. Inflation is likely to rise mid-term.

Eurozone GDP grew by 0.4% in Q1 2025, driven by exports and strong performance in Spain and Italy, though Germany continued to underperform, barely avoiding recession. Forward-looking indicators suggest weaker momentum in Q2, with rising savings, subdued investment, and fading export support. Inflation held steady at 2.2% in April, but core and services inflation rose to 2.7% and 3.9% respectively, reflecting persistent domestic pressures. Energy costs declined, but price expectations remain high, and tariff-related risks could drive inflation higher. German inflation eased to 2.1%, yet core and services prices continued to climb. Sentiment across the Eurozone worsened due to trade tensions, though German consumer confidence improved slightly, aided by political developments. While some industrial signals have stabilised, broader sentiment remains weak, especially in smaller economies. Overall, we expect inflation to rise modestly in the medium term amid ongoing wage growth and trade frictions, while economic activity is likely to stagnate before a tentative recovery begins in 2026.

Eurozone GDP grew 0.4% in Q1 2025, led by exports and Spain. Germany lagged again, and the outlook dims amid weak confidence, investment, and consumption.

Eurozone GDP expanded by a stronger-than-expected 0.4% in the first quarter of 2025, offering a positive start to the year after months of subdued activity. The growth was largely driven by improved net exports, likely boosted by front-loaded shipments ahead of anticipated US tariffs. Among the major economies, Spain stood out with a robust growth of 0.6%, while Italy exceeded expectations at 0.3%. In contrast, France and the Netherlands disappointed, posting only 0.1% growth each. Germany, after contracting by 0.2% in the final quarter of 2024, narrowly avoided a technical recession with a modest 0.2% rebound in Q1, supported mainly by household consumption and a slight recovery in investment. However, its broader growth trajectory remains underwhelming—Europe's largest economy has not seen meaningful expansion since 2018, and with only 0.1% GDP growth forecast for the full year, structural weaknesses, industrial stagnation, and external headwinds continue to weigh heavily. Reflecting this prolonged malaise, Germany’s growth in Q1 was half that of the broader Eurozone, marking the sixth consecutive quarter in which it has trailed the rest of the currency bloc. Meanwhile, Ireland’s 3.2% surge—heavily influenced by the activity of multinational corporations—contributed around 0.1 percentage point to the Eurozone’s overall figure. Despite this initial momentum, forward-looking indicators for the second quarter are already pointing to a slowdown. April data reveal a decline in business and consumer confidence, and the outlook is clouded by weaker consumption amid a rising savings rate, soft investment due to persistent uncertainty, and the likely reversal of earlier export gains.

We expect the economy to remain close to stagnation this year, with a tentative recovery beginning to take shape in 2026.

Eurozone inflation remains stable at 2.2%, but rising core and services inflation, global trade uncertainty, and strong wage growth cloud the medium-term outlook.

Eurozone headline inflation held steady at 2.2% in April, continuing its gradual convergence towards the European Central Bank’s (ECB) medium-term target, though the underlying dynamics present a more nuanced picture. Core inflation rose to 2.7%, driven primarily by a notable acceleration in services inflation to 3.9%, highlighting persistent price pressures in labour-intensive sectors amid strong wage growth and resilient consumer demand. Despite a favourable disinflationary environment—reflected in a 3.5% year-on-year decline in energy prices and a robust euro exchange rate above 1.12—headline inflation slightly missed expectations, indicating that structural inflationary forces remain active beneath the surface. Goods inflation continues to be subdued, partly due to postponed retaliatory trade measures by the European Commission and a growing diversion of Chinese exports away from Western markets, which has tempered input cost pressures for Eurozone producers. Nonetheless, business surveys suggest that firms’ selling price expectations remain elevated, particularly in services, reinforcing the view that disinflation may proceed unevenly. The ECB is therefore likely to maintain a cautious approach to monetary easing, balancing improving inflation metrics against latent price risks. Looking ahead, the inflation trajectory is clouded by considerable uncertainty, with the potential restructuring of global supply chains, persistent geopolitical tensions, and divergent monetary policy stances among major economies posing both upside and downside risks. While current data suggest inflation is broadly under control, the medium-term outlook remains highly unpredictable and dependent on external shocks, wage-price dynamics, and the ECB’s policy calibration.

We expect Eurozone inflation to rise in the medium term due to mounting tariff pressures, persistent services inflation, wage growth, and evolving global trade dynamics.

Eurozone economic sentiment dropped in April due to trade tensions and tariff uncertainty, with Germany showing a slight improvement in consumer confidence despite broader pessimism across the region.

Economic sentiment in the Eurozone declined notably in April, falling to its lowest level since December, as renewed trade tensions and tariff uncertainty—exacerbated by recent U.S. policy developments—have undermined the region’s fragile recovery. The European Commission’s sentiment index dropped to 93.6 from 95.0 in March, reflecting a broad-based deterioration across key sectors, although impacts varied by country; smaller economies such as Ireland, Belgium, and the Netherlands experienced sharper declines. However, Germany has shown a more nuanced picture: despite broader Eurozone pessimism, German consumer confidence unexpectedly improved in May, with the GfK sentiment index rising to -20.6 from a revised -24.3 the previous month, defying expectations of a further decline. This rebound is attributed to the calming effect of the prospect of a new government, which has temporarily bolstered household sentiment despite persistent concerns over trade policy. The "willingness to buy" indicator in Germany improved significantly, rising from -8.2 to -4.9, while the "willingness to save" fell from 13.8 to 8.4, suggesting consumers may be more inclined to spend rather than save. Meanwhile, in the wider Eurozone, despite tentative signs of improvement in industrial conditions—such as easing inventories and a bottoming-out of order books—trade-related risks and uncertainty continue to dampen prospects. Although the rhetoric around tariffs has softened recently, the elevated level of applied tariffs and the threat of further measures remain a significant drag. Without a substantial shift in U.S. trade policy, overall Eurozone sentiment and economic momentum are likely to stay subdued in the coming months.

We expect that the Eurozone’s economic sentiment will remain subdued in the coming months, with trade tensions and tariff uncertainty continuing to weigh on recovery, despite Germany’s short-term improvement in consumer confidence.

German inflation eased to 2.1% in April, but core and services inflation rose, highlighting persistent domestic price pressures despite broader disinflationary trends and external uncertainties.

German headline inflation moderated to 2.1% year-on-year in April, down from 2.2% in March, marking its lowest level in seven months, largely due to a continued decline in energy prices and a muted seasonal impact from the Easter holiday, which typically boosts prices in leisure and hospitality sectors. However, the slowdown in inflation was less pronounced than expected, and core inflation—which excludes volatile items such as energy and food—rose to 2.9% from 2.6%, driven by a significant increase in service prices, indicating that underlying price pressures remain resilient. The closely watched services print also jumped to 3.9%, up from 3.5% in the previous month, further underscoring the strength of domestic price pressures. This divergence highlights persistent inflationary dynamics, particularly in the domestic services sector, despite a broader disinflationary trend. The flash estimate offers only partial relief to the European Central Bank, which is closely monitoring inflation developments ahead of potential rate adjustments. Regional data confirms that the drop in headline inflation was primarily driven by energy, while categories such as leisure, hospitality, and transport showed limited seasonal price effects, suggesting subdued consumer demand. At the European level, harmonized inflation also edged lower to 2.2% from 2.3%. Looking forward, the trajectory of German inflation will be shaped by two key macroeconomic forces: global trade tensions and domestic fiscal stimulus. Trade-related uncertainties and a stronger euro may apply further downward pressure on prices through cheaper imports and reduced commodity costs. Conversely, government spending—particularly on infrastructure projects—could reintroduce inflationary pressures in the medium to long term, especially in sectors already constrained by labour shortages and elevated input costs. As such, while headline inflation appears to be easing, the persistence of core inflation and structural supply-side challenges suggests that inflation risks remain tilted to the upside.

We expect that inflation in Germany will remain sticky in the near term, as resilient service prices offset broader disinflationary trends and external cost relief.