XTB Analysis: The European economy is showing the first signs of recovery. Meanwhile, France remains under pressure and Germany awaits the fiscal package

Opinion of Claudiu Cazacu, strategy consultant XTB România

In midsummer, there are signs of expectations for the European economy, after a long “winter” of worries and pressures, but the signs of recovery are still quite fragile, says Claudiu Cazacu, strategy consultant at XTB Romania.

The S&P composite PMI index for the Eurozone rose to 51.1 points, 0.2 points above the July value and 0.5 points above expectations. A reading above 50 usually signals economic growth.

The improvement was more consistent in the industrial sector, the most affected previously, with a jump of 0.7 points, while the index for services slightly retreated, by 0.3 points. New industrial orders reported their first increase since 2022.

This is a relevant result, especially since, in terms of new export orders, the decline that began in March 2022 not only continued, but accelerated to the fastest pace in the last five months. Although it is still early to describe solid trends, there are signs of recovery in the European bloc, despite trade pressures.

The European economy shows signs of resilience

The favorable trend of the composite PMI is mirrored by the IFO index for Germany, which rose to 89 points, the highest level in the last 3 years. The advance was driven by more optimistic expectations, which more than compensated for a slight deterioration in the value for current conditions. While this is good news, especially compared to the compressed levels of recent years, to put things in perspective, the indicator spent almost the entire decade of 2010-2019 above 100 points, with sustained periods even above 110 points.

The European economy seems, in light of recent data, robust enough to overcome the problems imposed by trade tensions with the US. It is true that the agreed level of 15% is more tolerable compared to the values ​​previously discussed, but it still represents an increase compared to previous years. For the continent’s important automotive sector, additional steps are needed before lowering customs duties, which currently reach 27.5%, to the standard benchmark, explains Claudiu Cazacu.

If the conditions requested by the US are met by the end of the month, a retroactive reduction of duties would be possible, according to European negotiator Maros Sefcovic. The current data boosts the morale of observers and the likelihood that the European economy will show growth at least in line with estimates. The European Central Bank sees an advance of 0.9% this year and 1.1% next year for the Eurozone, below the Fed’s estimate of 1.4% and 1.6%. Both sets of forecasts are due to be revised next month.

Germany still facing difficulties

However, older question marks remain, as well as some more recent ones. If, in general, the indicators for European industry are oriented towards recovery, German industry is still suffering, with a slight deterioration in current conditions. The wind that inflates the sails of the optimists’ ship is linked to projections and expectations that are still insufficiently supported by data, points out Claudiu Cazacu.

The €500 billion fiscal stimulus package is expected to have a more pronounced effect starting next year, and it is possible that a significant part of the optimism in the IFO and S&P surveys is associated with its anticipation.

Thus, the situation in the real economy may still be problematic and vulnerable to trade tensions, which increases the importance of an effective implementation of the program announced by Germany. Moreover, optimism was more pronounced in the area of ​​capital goods, set to benefit from the new economic environment, in anticipation of increased infrastructure spending.

Germany, however, is facing structural problems, a fact that Chancellor Merz himself has acknowledged. Although energy costs have fallen, the aging workforce, insufficient digitalization, bureaucracy or competition from other economies, especially Asian, remain major difficulties in the medium term.

Labor productivity in the US is about 25% higher than in the Eurozone. In the second quarter, Germany’s GDP fell by 0.3%, with exports down 0.1%, private consumption up just 0.1% and government consumption up +0.8%, adds the XTB Romania strategy consultant.

In addition to the difficulties of overlapping crises in the automotive sector, the dynamics of companies such as Carl Zeiss Meditec, a manufacturer of medical equipment, which has lost 78% of its value since its peak four years ago, or the well-known sportswear brand Puma, with shares down 52% this year and 82% from their peak in 2021, are illustrative, even after a 16% jump in Monday’s session. The reason for the appreciation: not a spectacular increase in profit or sales, or the launch of new products, but the company being put up for sale.

France is in the midst of political tensions

Another major European economy is facing a political crisis. In France, the government could fall following a no-confidence vote on September 8, and the stock market opened down almost 2%. The tense situation illustrates the difficulty of implementing painful but necessary fiscal reforms to keep public debt, which has reached 114% of GDP, in check. The divergence between Germany’s ample fiscal space, which allows for economic stimulus, and France’s negative one is another reason for possible investor caution towards the Eurozone as a whole.

In addition, clouds are gathering from the US, with President Trump talking about new customs duties and export restrictions, including for technology, imposed on states that have taxes on digital services. Canada and some EU states were in this situation, but Canada gave up on them in negotiations with the US.

In the European economic landscape, there have been signs of optimism, but the signs of recovery are still fragile. A series of risks, from political instability in France to new rounds of trade restrictions from the US, should be avoided to support the scenario of a significant economic acceleration in the Eurozone next year, Claudiu Cazacu, strategy consultant at XTB Romania, also points out.