The eurozone’s economic growth remains steady, buoyed by Germany’s fiscal generosity, which bolsters sentiment and counters the unrest in France. However, challenges loom as U.S. tariffs begin to fully impact, according to key data released on Tuesday.
This year, the eurozone has surpassed economists’ growth expectations, prompting discussions on the bloc’s resilience and the potential fallout from France’s political unrest across its 20 countries. Supporting this resilience, the HCOB flash composite PMI inched up to 51.2 in September from 51.0 in August, marking nine consecutive months of growth.
Germany’s Influence on Eurozone
Despite this, the underlying trends are mixed, indicating that the industrial rebound may be waning, leaving services to drive growth.
“The details are less optimistic than the headline index implies,” stated Riccardo Marcelli Fabiani from Oxford Economics.
“Sentiment is weak, and foreign orders continue to decline, suggesting no significant rebound following the export drop due to tariffs,” he added.
Another issue is that the steady PMI improvement is largely due to Germany, where fiscal expansion is expected to fuel growth for years.
“France is notably struggling,” said ING economist Bert Colijn. “Political instability is mirrored in the French economy’s performance.”
Germany’s PMI surged to a 16-month high of 52.4, surpassing expectations of a slight rise to 50.6 from 50.5. Conversely, France’s activity declined for the 13th month at the fastest rate since April, with its PMI falling to 48.4. Reflecting the eurozone trend, UK firms also experienced a slowdown, with the PMI dropping to 51.0 in September from 53.5 in August.
Impending Impact of U.S. Tariffs
The eurozone has yet to face the full brunt of U.S. tariffs, which are expected to further decelerate its modest growth, according to an OECD report.
“The full impact of tariff hikes is still unfolding—many changes are gradual, and companies initially absorb some increases, but the effects are becoming clearer,” the OECD noted.
This will decelerate eurozone growth to just 1.0% next year from 1.2% this year, as trade tensions and geopolitical uncertainty offset the benefits of lower ECB rates and Germany’s fiscal expansion.
UK growth is also expected to fall to 1.0% next year from 1.4% in 2025 due to tighter fiscal policies, higher trade costs, and increased uncertainty.
“Germany’s fiscal expansion is set to enhance economic activity, but anticipated fiscal tightening in France and Italy will curb growth,” the OECD added.
Nonetheless, the OECD confirmed the ECB’s prediction that inflation will remain at or just below the 2% target, sustaining hopes for further policy easing, particularly as consumption growth weakens.
