Eurozone growth surprised on the upside despite a lacklustre international environment. Momentum is set to accelerate in 2026, supported in particular by expansionary fiscal policy.
The eurozone economy beat expectations with 0.2% growth in the third quarter. It is projected to grow by a little over 1% in 2025, close to its potential. The figures are encouraging, especially in light of US protectionist measures, although third-quarter performance differed markedly between member states. Among the major European economies, Spain and France posted solid performances over the quarter. In contrast, the Italian and German economies stagnated.
Despite severe political tensions, the French economy surprised with 0.5% growth, fuelled mainly by corporate investment and the strength of aerospace, chemicals, and pharmaceutical exports. However, recent PMI leading indicators suggest that this performance is unlikely to be replicated in the fourth quarter.
In contrast to France, Germany – Europe’s largest economy – disappointed once again. GDP stayed flat over the period, and industrial output was down amid summer plant closures. German exports shrank in Q3 2025. Yet the recent uplift in sentiment indicators signals growing confidence that German activity will pick up over the coming months, boosted by the stimulus plan.
Unsurprisingly, the European Central Bank (ECB) kept rates unchanged at 2% in October. The decision was in line with economists’ expectations, especially in light of lower downside risks to growth. The monetary policy committee offered no new forward guidance on policy. Financial markets currently expect rates to remain at their current level in 2026. Although it cannot be ruled out, we also think a further rate cut looks less likely.
Headline inflation no longer seems to be a significant threat. In October, the annual consumer price index (CPI) ticked up to 2.1%, which is close to the ECB’s target and down on the previous month. Core inflation (which strips out the prices of volatile components, such as energy and food) was stable at 2.4%, pushed up by service price rises. However, it should moderate in 2026 as wage pressures ease. The recent ECB wage tracker survey predicts a sharp slowdown in negotiated wage growth in 2026.
In contrast to the ECB, which is nearing the end of its monetary easing cycle, the Fed has continued to lower rates. For the second time in 2025, the US central bank cut its benchmark rate by 0.25% to a range of 3.75–4% in a move widely anticipated by the markets. The sharp slowdown in the US labour market seems to argue in favour of further monetary easing.
However, this view is complicated by two key factors. First, the government shutdown meant no official statistics were published. After more than 40 days, a political compromise has finally ended the longest US budgetary deadlock in history. Second, job creation needed to keep unemployment stable has fallen considerably (probably less than 50,000 monthly) due to the Trump administration’s migration crackdown.
The ensuing lack of visibility, combined with inflation still hovering close to 3%, has split opinion among Federal Reserve members, creating uncertainty about whether the Fed will lower rates again in December.
The Federal Reserve’s monetary policy arm also announced an end to balance sheet runoff, known as quantitative tightening or QT, from December. This move away from QT, which is also accommodative, comes amid pressures on US money market rates. The monetary authorities are set to stabilise the size of the balance sheet by investing more in short-term Treasury securities, which will better align the duration of the Fed’s portfolio with that of the US government debt market.
Donald Trump and Xi Jinping sealed a one-year trade truce during their long-awaited meeting at the end of October at the APEC (Asia-Pacific Economic Cooperation) summit in South Korea. China secured a modest 10% reduction in US tariffs in return for a range of measures to combat fentanyl trafficking. However, China’s commitments to the United States also seem flimsy. China will purchase American soybeans and announced a one-year delay to its rare-earth export controls, introduced at the beginning of October.
The agreement between the two is a fragile truce. China’s stated policy of accelerating technology developments will keep tensions high and harden rivalry between the two economic powers.
Quarterly results in the United States exceeded market expectations, with annual earnings growth of close to 15%. Following an excellent month in October, US indices dipped in early November. The surge in investment spending on artificial intelligence announced by market leaders has stoked fears of a dilutive effect on profits in the coming years. With valuation indicators high, continued strong earnings momentum appears essential.
Damien Petit, CFA, Head of Private Banking Investments,
Banque de Luxembourg
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Economy - EU growth outpaces expectations, despite significant disparities - Banque de Luxembourg
