The fragile recovery – ABN AMRO

Consumption and industry are continuing to recover, despite the looming new risks to the outlook. The likely passage of a 2026 budget in France is also a welcome development. We do not expect a lasting solution to France’s fiscal woes, but nor do we expect the country to descend into a crisis. Eurozone inflation remains well behaved, likely keeping the ECB on hold for the foreseeable future. But persistent undershoots in France and Italy are a cause for concern, ABN AMRO’s economists Bill Diviney and Jan-Paul van de Kerke report.

Eurozone growth stabilises as consumers and industry recover

“The eurozone economy is not doing too badly at present. Incoming data for Q4 suggests the European consumer is regaining some confidence, with consumption seeing a lift from a recovery in car sales in particular (up 5.5% y/y in the 3 months to November), but also services. On the industrial side, meanwhile, although exports to the US are seeing ongoing weakness on the back of the tariff shock, manufacturing continues to hold up, with output growth consistently positive in annual terms throughout 2025 – a turnaround from the declines of 2023-24. German factory order data suggests the recovery is being driven primarily by domestic orders, though external demand has also showed signs of firming recently – again, despite the drag from the US. It is encouraging that Europe is looking to diversify export destinations, and that even in the current hostile trade environment, European industry seems to be finding its feet again.”

“Some further good news hails from France, which at the time of writing appears on the cusp of finally passing a 2026 budget, after months of wrangling. PM Lecornu will after all resort to using article 49.3 to push through a budget without majority support in the French Assembly, but the centre-left has all-but promised to abstain in a vote of no confidence in the government after extracting a number of significant concessions, including scrapping certain benefit cuts and opting not to raise taxes on households. France’s deficit will still be an eye-watering 5% of GDP this year, but the government continues to do just about enough to avoid a fiscal crisis. Our base case continues to see France muddling through its fiscal quagmire, neither definitively resolving it nor entering a downward spiral. This status quo will likely persist now until the presidential election in 2027.”

“Inflation meanwhile remains broadly well behaved – at least in the aggregate. Headline inflation came in at 1.9% in December, having held remarkably close to the ECB’s 2% for the best part of a year now. The benign headline hides a discomforting divergence in inflation trends among some of the key eurozone constituents. 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 above target. Inflation divergence is not new to the eurozone, and is not necessarily a problem. For instance, a similar divergence between north and south was evident before the pandemic, too. The difference between now and then is that aggregate eurozone inflation was also well below target, and ECB monetary policy was therefore much more accommodative. As things stand, with aggregate core inflation expected to hold steady over the coming years, we expect the ECB to remain comfortable holding rates where they are.”