Consumption and industry continue to recover, despite new risks looming over the outlook. The passage of the 2026 budget in France is also a welcome development. We do not expect a permanent solution to France’s financial problems, but we also do not expect the country to slide into crisis. Eurozone inflation remains behaving well, and is likely to keep the ECB on hold for the foreseeable future. But persistent imbalances in France and Italy are a cause for concern, said Bill Devigny and Jean-Paul van de Kerk, economists at ABN AMRO.
Eurozone growth stabilizes as consumers and industry recover
“The Eurozone economy is not doing too badly at the moment. Data coming in for the fourth quarter suggest that the European consumer is regaining some confidence, with consumption picking up from a recovery in car sales in particular (up 5.5% y/y in the three months to November), but also in services. On the industrial side, at the same time, although exports to the US are seeing continued weakness on the back of the tariff shock, manufacturing remains resilient, with production growing consistently positively year on year throughout 2025 – a shift from German factory orders data in 2023-2024 suggest that the recovery is primarily driven by domestic orders, although external demand has also shown signs of improvement recently – again, despite the decline from the US, it is encouraging that Europe is looking to diversify its export destinations, and that even in the current hostile trading environment, European industry appears to be getting back on its feet.
“Some more good news comes from France, which at the time of writing appears to be on the cusp of passing the 2026 budget, after months of debate. After all, Prime Minister Lecornu will resort to using Article 49.3 to push through the budget without majority support in the French Assembly, but the center-left has promised to abstain from a vote of no confidence in the government after extracting a number of important concessions, including scrapping certain benefit cuts and choosing not to raise taxes. France’s deficit will remain at a staggering 5% of GDP total this year, but the government continues to do enough to avoid a financial crisis.
“At the same time, inflation remains broadly doing well – at least overall. Headline inflation stood at 1.9% in December, having remained remarkably close to the ECB’s 2% rate for most of the year now. The benign headline hides a disturbing divergence in inflation trends among some of the eurozone’s key components. Inflation in France and Italy in particular remains well below the ECB’s target, while inflation in Germany and the Netherlands has been either at or at Inflation divergence above target is not new to the eurozone, nor is it necessarily a problem. For example, similar north-south divergence was evident before the pandemic as well. The difference between now and then is that overall inflation in the eurozone was also well below target, and thus ECB monetary policy was much more flexible, and with core inflation expected to stabilize over the coming years, we expect the ECB to remain comfortable keeping interest rates at their current levels.
