EU Economic Outlook – December 2025: Soft Landing, Stable Inflation and Policy on Hold

EU Economic Review – November 2025

Low growth, easing inflation, and a two-speed Euro Area recovery

The Euro Area closed November 2025 in what has become its signature macro mix: low growth, easing inflation, and a clear two-speed economy. Headline and core inflation continued to drift lower, labour markets stayed broadly stable, and the region’s external balance remained one of its main strengths. At the same time, the recovery is far from uniform. Services and external demand are keeping the Euro Area economy in positive territory, while manufacturing and construction—especially in Germany—remain the weak links.

For the European Central Bank (ECB), the story is increasingly clear. The rate-hiking cycle is behind us, disinflation is progressing in an orderly way, and the policy debate is shifting from how tight policy should be to how long it needs to stay restrictive. Markets are already looking ahead to the first rate cuts in 2025 rather than fearing further tightening today.

1. Growth and Activity: Services Carry the Euro Area

Euro Area growth in Q3 remained positive but subdued, consistent with a low-momentum expansion. Real GDP grew by around 0.2% quarter-on-quarter and 1.4% year-on-year, a modest upside surprise that still points to a soft environment.

Beneath the surface, performance across the big four economies is uneven:

• Germany is essentially stagnating. GDP was flat in the quarter after a small contraction previously, and annual growth is barely positive. Retail sales weakened again, underlining soft household demand and ongoing pressure on its industrial and construction base.
• France is doing somewhat better. Output grew 0.5% QoQ and just under 1% YoY, supported by steady consumer spending and a very low inflation backdrop that is helping real incomes.
• Italy delivered some of the more encouraging industrial signals. Industrial turnover rebounded, and previous production data beat expectations, while a stronger trade surplus with non-EU partners highlights how external demand is cushioning domestic softness.
• Spain is still growing, but at a slower pace. Retail sales are decelerating, and the current account surplus has narrowed, even as business confidence has edged off its lows.

Survey data reinforce this “services-up, industry-down” narrative. Eurozone PMIs for November show services activity comfortably in expansion territory, while manufacturing has slipped back below 50 into mild contraction. The composite index, just above 52, is consistent with slow but positive GDP growth. Construction remains a clear drag, with indices well below 50—particularly in Germany and France.

In short, November confirmed a services-driven, low-gear expansion. Industry and construction are still under pressure, with Germany the main soft spot, while Italy and parts of Spain provide pockets of resilience on the manufacturing and trade side.

2. Labour Markets: Plateau, Not Collapse

The Euro Area labour market remains one of the anchors of the current cycle. Employment in Q3 grew modestly—around 0.1% QoQ and 0.5% YoY—showing that total employment is still edging higher despite weak output.

Germany’s unemployment rate held near 6.3%, with only a small increase in the number of unemployed. In France, non-farm payrolls were flat, and jobseekers ticked up slightly, signalling that the phase of continuous tightening is over but that there is no sharp deterioration.

Overall, the region’s labour market can be described as:

• Tight by historical standards,
• But moving sideways to slightly softer rather than improving further.

This backdrop is helpful for the disinflation process: wage pressures can cool without triggering a surge in unemployment. At the same time, it also means there is little underlying momentum from the labour market to drive a stronger domestic demand upswing.

3. Consumers and Confidence: Cautious, Not in Crisis

Household demand across the Euro Area remains soft but resilient. Retail sales at the aggregate level are essentially flat on the month, with only modest gains year-on-year. That is enough to keep the economy moving, but not enough to signal a consumer-led recovery.

At the country level, the picture is mixed:

• German retail sales slipped again and are sharply weaker on an annual basis, highlighting still-cautious households.
• French consumption is a relative bright spot, with monthly spending still rising as households benefit from very low inflation.
• Spanish retail growth remains positive but has clearly cooled, pointing to softer domestic demand.

Confidence data confirm the cautious tone. The European Commission’s sentiment index is stuck below its long-term average, while Euro Area consumer confidence remains deeply negative. Business surveys show German sentiment fading again, Spanish confidence becoming “less bad” but not yet upbeat, and French and Italian sentiment stabilising at subdued levels.

The net result is a Euro Area consumer that is wary rather than panicked, spending enough to avoid recession, but clearly more defensive than earlier in the cycle.

4. Inflation and Wages: Steady Disinflation, No Deflation

From a policy perspective, inflation is the most important part of the November story—and here, the trend remains favourable for the ECB.

Across the Euro Area:

• Headline CPI is hovering around 2.1% year-on-year, with small monthly increases.
• Core inflation is in the 2.4–2.5% range and trending lower, signalling that underlying price pressures—especially in services—are cooling, albeit gradually.
• Labour costs are rising more slowly, with the labour cost index decelerating slightly in Q3, consistent with a slower pace of wage-driven inflation.

Country-level data show broad disinflation with differences in speed. Germany’s inflation rate is close to 2%, France is temporarily near zero, Italy is slightly above 1%, and Spain remains on the high side of the group but with stabilising momentum. Producer prices and import prices are weak or negative across much of the bloc, signalling very limited upstream inflation pressure.

Inflation expectations and corporate price intentions have normalised from the extremes seen during the energy shock. Surveys show households and firms still expecting some price increases ahead, but at rates broadly consistent with inflation near—rather than above—the ECB’s target.

The takeaway is clear: the Euro Area is in a controlled disinflation phase, not sliding into deflation. This environment gives the ECB space to hold rates steady and start planning a cautious easing path for 2025.

5. External Sector: Trade and Current Account as Key Strengths

One of the strongest aspects of the Euro Area macro picture remains the external sector. Lower energy prices, solid export performance, and a still-competitive euro have combined to produce sizeable surpluses:

• The Eurozone current account posted a robust surplus in November, helped by a strong goods balance and a normalising energy bill.
• The trade surplus remains in the high-teens to low-twenties billion euro range, supported by decent export volumes and softer imports.

Germany continues to run a sizeable trade surplus, while Italy’s surplus with non-EU partners has widened, underlining the importance of external demand for its growth outlook. France and Spain still run trade deficits, but external funding conditions remain stable.

These surpluses are an important buffer. They help offset weak internal demand, support the euro, and provide a positive fundamental anchor for Euro Area sovereigns and corporates in global markets.

6. Money, Credit, and Sovereign Markets: Restrictive but Orderly

The behaviour of money and credit aggregates is exactly what you would expect after a forceful ECB tightening cycle:

• Broad money (M3) is growing slowly but remains positive.
• Bank lending to corporates and households is expanding at a low single-digit pace, pointing to restrictive but functioning credit conditions.

This pattern suggests that monetary policy is doing its job—cooling demand and supporting disinflation—without triggering a damaging credit crunch.

Sovereign bond markets are calm. German Bund yields around 2.7% for the 10-year are consistent with a disinflationary environment and expectations of a gradual ECB easing cycle ahead. Italian, Spanish, and French yields have edged lower at recent auctions, and there are no clear signs of renewed fragmentation risk. The mild steepening in some curves reflects higher-for-longer real rate expectations and fiscal concerns, not imminent stress.

7. ECB Policy and Outlook: From Fighting Inflation to Managing Slow Growth

Putting the pieces together, November’s data sends a coherent signal to the ECB:

• The inflation shock has largely been tamed. Headline inflation is near target, core continues to drift lower, and wage and producer price pressures are moderating.
• Growth is weak but not collapsing. Services and exports are keeping the Euro Area on a narrow growth path, even as manufacturing and construction drag.
• Labour and credit markets are stable, if slightly softer, with no sign of systemic stress.

In this context, the ECB has little reason to hike again. The most likely path is a prolonged pause, with policymakers “waiting and watching” disinflation progress while gradually preparing markets for the first rate cuts in 2025. Markets have already started to price that story, with core yields easing and demand for higher-yielding peripheral debt remaining solid.

For now, the data do not justify aggressive easing; core inflation is still above 2% and services prices are only slowly normalising. But the direction of travel is clear: from emergency inflation fighting toward managing a period of low growth and low, but positive, inflation.

8. Overall Assessment: A Disinflationary, Low-Growth Euro Area

The Euro Area in November 2025 can be summarised as follows:

• Growth: Slow but positive, driven by services and exports, with manufacturing and construction still under structural pressure—especially in Germany.
• Labour: Employment is holding up, and unemployment remains low, but the improvement phase is over.
• Demand and confidence: Households are cautious, not collapsing; business sentiment is subdued but stabilising.
• Inflation: Disinflation is well advanced. Headline is near target, core is easing, and upstream price pressures are weak.
• External position: Strong trade and current account surpluses provide a critical macro cushion.
• Policy and markets: The ECB is firmly in “pause mode,” and the next major move is likely a carefully managed easing cycle in 2025.

Heading into December, the Euro Area looks set to remain a low-growth, low-inflation economy with solid external finances but persistent structural weaknesses in industry and construction. The central challenge for policymakers will be to support activity and investment without undermining the hard-won credibility earned during the inflation fight.

EU Economic Outlook – December 2025

Soft landing, stable inflation, and policy turning neutral

The European Union enters December 2025 in a relatively stable macro environment: inflation is easing back toward target, growth is modest but positive, and monetary policy has largely returned to neutral. After several turbulent years of energy shocks, supply-chain disruptions, and rapid rate hikes, the current backdrop looks increasingly like a “soft landing” – slower growth without a recession and inflation broadly under control.

According to the European Commission’s Autumn 2025 Economic Forecast, EU real GDP is expected to grow by 1.4% in both 2025 and 2026, edging up to 1.5% in 2027. For the euro area, growth is projected at 1.3% in 2025, 1.2% in 2026, and 1.4% in 2027. These are not spectacular numbers, but they are consistent with a mature, advanced economy growing close to potential after a period of policy tightening.

On the inflation side, the picture is steadily improving. Headline inflation in the euro area is forecast to decline toward the ECB’s 2% target, reaching around 2.1% in 2025 and hovering near 2% through 2026–27. ECB staff projections broadly align with this view, with HICP averaging 2.1% in 2025, cooling to 1.7% in 2026 and edging back up to 1.9% in 2027. That profile is exactly what policymakers hoped for: inflation brought back under control without a deep downturn.

Labour markets remain a key source of resilience. The Commission expects EU unemployment to stay around 5.9% in 2025–26, slipping to 5.8% in 2027, while euro area joblessness is projected to decline from 6.3% in 2025 to 6.1% in 2027. Solid employment, easing inflation, and still-favourable financing conditions – combined with support from the Recovery and Resilience Facility – together underpin the outlook for modest but steady growth.

Key Macro Indicators: Growth, Inflation, and Labour

The baseline macro scenario for December 2025 can be summarised in four main points:

• Growth: The EU economy is expected to expand by around 1.4% annually over 2025–26, picking up slightly by 2027. The euro area tracks just below this pace but remains in positive territory throughout the forecast horizon.
• Inflation: Headline inflation is projected to stay close to 2%, with no return to the double-digit readings of 2022. Core inflation is gradually moderating as energy prices, supply-chain pressures, and wage growth normalise.
• Labour markets: Unemployment is low by historical standards and is expected to remain stable or improve marginally. This supports household incomes and helps prevent the kind of demand collapse that would push the economy into recession.
• Policy rates: Following the ECB’s rate cuts in 2024 and early 2025, the main refinancing rate is around 2.15%, the deposit facility 2.00% and the marginal lending facility 2.40%. Markets currently expect the ECB to leave rates unchanged throughout 2025, with only marginal adjustments in 2026–27.

Overall, the macro data point to a euro area that has largely completed its inflation-adjustment phase and is transitioning into a period of low but stable growth.

December 2025: Key Data and Policy Events

December is a dense month for data releases and policy meetings, and several dates will be closely watched by investors and analysts:

• 2 December 2025 – Euro Area HICP Flash (November)
• The flash estimate for November HICP will give an early signal on whether inflation is still trending toward the 2% target. Any downside surprise would reinforce expectations of prolonged policy stability or earlier easing; an upside surprise could revive concerns about sticky inflation.
• 17 December 2025 – Final HICP (November)
• The final inflation data will refine the flash reading and provide the last full inflation picture before the ECB’s December meeting and new projections.
• Throughout December – Labour, GDP, and PMIs
• Eurostat will release updated unemployment and industrial production figures, while flash PMIs for December will offer a first look at year-end momentum in manufacturing and services.

Beyond the macro data, several EU institutional meetings add important policy context:

• 1 December – Foreign Affairs Council (Defence)
• EU defence ministers meet in Brussels to discuss military support for Ukraine, defence readiness, and a new roadmap for capability building. These discussions can shape medium-term defence spending and have implications for the European defence industry and related equities.
• 2 December – EU–Armenia Partnership Council
• The 6th EU–Armenia Partnership Council will review progress on reforms, rule of law, energy cooperation, and the Armenia–Azerbaijan peace process. This reflects the EU’s broader strategy in the South Caucasus and its interest in diversified energy routes and regional stability.
• 12 December – ECOFIN Council
• EU finance ministers will discuss customs reform, the single-currency package including legislation for the digital euro, new rules for customs duties on small parcels, and multiple files under the Savings and Investment Union. They will also review the 2026 European Semester, simplify financial services regulation, amend Recovery and Resilience Facility plans, and tackle tax coordination. These decisions directly affect the operating environment for banks, payment providers, e-commerce platforms, and capital markets.
• 16 December – General Affairs Council
• This meeting prepares the December European Council summit, typically shaping the agenda on enlargement, budgetary issues, and inter-institutional priorities. It often sets the tone for the political messaging that follows at the leaders’ level.
• 18–19 December – European Council Summit
• EU leaders will meet in Brussels to agree on legislative priorities for 2026, sign a joint declaration between the main EU institutions, and discuss topics likely to include EU–U.S. trade relations, responses to U.S. tariffs, energy security, the EU budget, and enlargement. The outcomes may shift expectations on trade policy, fiscal strategy, and regulation, creating potential market moves.
• 18 December – ECB Governing Council Meeting and Press Conference
• This is the final ECB policy meeting of 2025. Markets broadly expect the deposit rate to remain at 2%, with no new cuts. The ECB will also publish updated macroeconomic projections, extending its forecast horizon to 2028. The tone of the press conference and the new projections will be key for bond yields, rate expectations, and the euro.

Market Outlook: Policy Stability, Modest Growth, and Focus on Fiscal

With the ECB having delivered eight cuts between 2024 and mid-2025, monetary policy is now broadly neutral. The deposit rate at around 2% and inflation is near the target, suggesting limited urgency for further changes. Markets and most forecasters expect no additional cuts in 2025, and only minor moves in 2026–27, unless growth or inflation diverges sharply from the baseline.

For fixed-income investors, this means:

• Short-term rates are likely to remain stable.
• Government bond yields may experience moderate volatility, driven more by fiscal dynamics and global risk sentiment than by ECB surprises.
• If fiscal expansion in countries like Germany and France pushes borrowing needs higher, yields at the long end of the curve could drift upward, even with stable policy rates.

On the inflation and currency front, headline inflation is expected to average just above 2% in 2025 and then hover around the target. Easing energy prices, normalised supply chains, and slowing wage growth all support the disinflation story. The euro is trading in a relatively narrow range against the dollar, caught between potential Fed easing and lingering geopolitical risk. December’s ECB meeting and incoming U.S. data will be watched for clues on relative policy paths.

For equity markets, the backdrop is cautiously constructive:

• The rate-cut story is largely behind us; from here, earnings growth, fiscal policy, and geopolitical risk will drive performance.
• Sectors linked to infrastructure, defence, green investment, and digitalisation may benefit from EU policy priorities and budget decisions.
• Political uncertainty, fiscal concerns in some member states, and external shocks remain key sources of volatility.

Risks to the Outlook

Despite the broadly benign baseline, several risks could shift the December 2025 outlook:

1. Trade tensions and tariffs – Ongoing debates over EU–U.S. trade, residual tariffs in sectors like steel and aluminium, and potential new trade measures could weigh on exports and business confidence.
2. Fiscal uncertainty – Elevated deficits in major economies and disagreements over EU fiscal rules could unsettle bond markets or trigger renewed debate around debt sustainability.
3. Geopolitical shocks – The war in Ukraine, tensions in the Middle East, or other flashpoints could impact energy prices, defence spending, and risk sentiment.
4. Inflation surprises – While the central scenario points to inflation around target, a renewed energy shock or persistent wage pressures could complicate the ECB’s task, while a sharper drop in inflation could bring forward rate-cut expectations.

Summary: A Soft Landing, But Not a Strong Boom

In December 2025, the EU economy stands at a relatively rare point in the post-pandemic cycle: inflation is near target, growth is modest but positive, and unemployment is at historically low levels. Monetary policy has shifted from emergency tightening to a stable, neutral stance, while fiscal and structural policies are gradually moving to the foreground.

Key December data releases and policy meetings – from HICP prints and PMIs to ECOFIN, the European Council summit, and the final ECB meeting of the year – will help confirm whether this soft-landing narrative holds. For investors, the focus now is less on “how high rates go” and more on how long they stay where they are, how fiscal policy evolves, and how Europe positions itself in a world of shifting trade patterns and geopolitical risks.

If inflation stays close to 2% and growth remains around 1–1.5%, the EU enters 2026 as a low-growth, low-inflation bloc with policy room, strong labour markets, and manageable risks—not a boom, but a far better landing than many feared just a few years ago.