Eurozone Economic Outlook — January 2026: Data-Driven Month Ahead of the ECB’s February Inflection

Eurozone (EU) Economic Review — December 2025

December’s four-week macro flow reinforced a “slow growth + cleaner inflation” regime in the euro area. Headline activity indicators improved modestly, employment continued to edge higher, and disinflation remained intact. However, manufacturing—particularly in Germany and France—and soft producer-price dynamics continued to signal fragile underlying momentum.

On policy, the ECB stayed on hold. Market attention is increasingly centred on forward guidance and wage follow-through as the key gating variables for any 2026 easing discussion.

Growth and activity: modest improvement, still low beta

Headline growth improved slightly: Q3 GDP +0.3% q/q (1.4% y/y). Employment also rose (+0.2% q/q; +0.6% y/y), taking total employment to 170.3 million—consistent with slow expansion rather than a stall.

Country-level hard data were mixed but broadly aligned with a “grind higher” narrative:

• Italy’s retail sales improved in October.
• French industrial production printed slightly positive.
• Spanish industrial production remained positive on a y/y basis.

Later in the four-week set, the industrial picture remained uneven: Germany posted a meaningful improvement on the margin, while Italy’s industrial output weakened—leaving the broader growth impulse steady but not accelerating.

Business surveys: services-led expansion, manufacturing remains the weak link

Survey data continued to describe a two-speed economy:

• November PMIs: Composite 52.8, Services 53.6, Manufacturing 49.6 (slightly contractionary), with Germany and France notably weak on manufacturing.
• Country details pointed to broader services resilience (France services rebounding above 50; Italy and Spain services holding stronger), while manufacturing momentum remained inconsistent across the bloc.

December takeaway: domestic-demand/services activity continued to carry the cycle, while manufacturing improved in pockets but did not deliver a clean euro-area re-acceleration.

Inflation: disinflation holds, pipeline pressures subdued

Inflation dynamics remained consistent with broad disinflation:

• November headline CPI hovered around 2.1%–2.2% y/y in the notes, with core CPI 2.4% y/y unchanged.
• Monthly prints were negative (CPI -0.3% m/m; core -0.5% m/m), and HICP ex energy & food held at 2.4% y/y.
• Producer prices remained soft: Eurozone PPI (Oct) +0.1% m/m; -0.5% y/y, consistent with muted upstream cost pressure.

Inflation dispersion across major economies remained notable (very soft headline inflation in France versus firmer harmonised readings in Germany/Spain). This supported an ECB posture that remains patient and data-dependent, rather than decisively shifting.

Labour market: adjusting, not cracking

Labour conditions remained stable: Eurozone unemployment 6.4%, with mixed country signals (Italy unemployment down; Spain unemployment changed negative).

For policy, the more important detail was moderation in wage and labour-cost readings in Q3 (both lower than prior), which—if sustained—reduces the bar for eventual easing.

Consumers, retail, and autos: cautious, rate-sensitive demand

Consumer-facing indicators suggested demand is holding up, but not re-accelerating:

• Retail sales were flat in October (0.0% m/m) but positive y/y (+1.5%).
• Autos softened sequentially in November at the EU level (-2.7% m/m), even though y/y growth remained strong (+12.9% y/y). France registrations slipped slightly y/y.
• Household sentiment remained fragile (Reuters/Ipsos PCSI down in the cited week), even as some investor-style measures improved.

External sector: modest support, still mixed overall

The external sector provided a mild cushion:

• France improved materially (current account swung to surplus; trade deficit narrowed as imports fell).
• Germany’s external balances softened in the cited week (current account surplus narrowed), while the broader euro area current account remained supportive in the later-week summary.

Overall, the external backdrop looked less of a drag than earlier in the year, but not a decisive growth engine.

Policy and rates: ECB on hold; funding conditions stable with pockets of sensitivity

The ECB kept rates unchanged (deposit facility 2.00%, main rate 2.15%, marginal lending 2.40%), shifting market attention toward guidance and the inflation/wage follow-through.

Sovereign funding conditions were broadly stable across core/semi-core auctions (Germany, France, Spain), though Italy showed some rate sensitivity, with its 3-year yield rising in the cited week.

Bottom line for December 2025

The euro area closed December’s four-week window in a steady-but-fragile configuration: headline growth improved modestly and employment held up; disinflation remained well-behaved with subdued pipeline pressures; and the ECB stayed on hold. At the same time, manufacturing weakness and soft household sentiment continued to cap the upside and keep the cycle services-dependent.

Eurozone Economic Outlook — January 2026

The euro area starts 2026 in a slow-but-stabilising regime: growth remains modest and uneven across members, while the disinflation trend is intact but still monitored for wage/services persistence.

The ECB’s December 18, 2025, assessment kept rates unchanged and continued to frame policy as data-dependent, with staff projections showing:

• Headline inflation averaging 1.9% in 2026 (and 2.0% in 2028)
• Growth at 1.2% in 2026 (after 1.4% in 2025)
• The deposit facility rate at 2.00% as per that decision

Monetary policy: January is “between meetings.”

The ECB’s next monetary-policy meeting is February 4–5, 2026, so January is primarily about data, speeches, and market conditioning, not an immediate decision.

Market pricing and economist expectations can diverge here: a Reuters poll indicated many economists expected the ECB to hold the deposit rate through end-2026, while rate futures were pricing about a 25 bp cut by end-2026 (at the time of the poll).

What matters most in January (Eurozone)

1) Inflation confirmation (especially services and wages)

January’s job is to validate that the disinflation process continues in the “sticky” components, not just headline energy/base effects. The ECB itself highlighted that services disinflation is expected but can be slower than previously assumed.

2) Activity stabilisation signals (industry/export channel)

The euro area’s industrial side has been fragile; investors will watch for evidence that the manufacturing trough is firming.

3) Divergence across countries (market relevance)

Even within “Eurozone-only,” the January narrative often splits between economies with stronger domestic demand/tourism momentum and those more exposed to exports and industrial cyclicality.

Key Eurozone dates in January 2026

• Jan 7, 2026: Euro area SAHICP (seasonally adjusted) flash estimate (ECB calendar)
• Jan 19, 2026: Euro area SAHICP final (ECB calendar)
• Jan 30, 2026: Euro area GDP (Q4 2025) – flash estimate (Eurostat release calendar for euro indicators)

Other data to watch in January

• Early January: Eurozone M3 money supply (Nov) — liquidity-growth gauge; slower M3 implies tighter financial conditions.
• Jan 5: Sentix investor confidence (Jan) — euro-area sentiment indicator.
• Jan 7: Eurozone CPI (Dec) — December inflation reading; markets will watch for continued moderation.
• Jan 9: German factory orders & Eurozone economic confidence (Dec) and unemployment rate (Nov) — industrial demand and labour-market signals.
• Mid-January: Industrial production & trade balance (Nov) — manufacturing momentum and external balance.
• Jan 20: CPI (final) (Dec) — final inflation data may include revisions; plus EU ZEW expectations (Jan) — analysts’ expectations survey.
• Late January: IFO business climate survey (Jan) — influential German sentiment indicator; plus the first snapshot of end-2025 conditions via Eurozone GDP (Q4 2025) first estimate and unemployment (Dec).

What to watch in January

• Whether consumer caution becomes more visible in hard consumption data
• Confirmation that wage moderation continues (the ECB’s key condition for a less restrictive path)
• Whether Germany/France manufacturing stabilises further or re-intensifies