1. Summary – Headwinds are easing, but new ones are emerging
2. Euro area – A resilience stress test so far successful
3. France – Political instability takes hold, activity holds up
4. Italy – An illusion of resilience
5. Spain – Growth refuses to slow down
6. United Kingdom – More fiscal pain to come
7. Economic & financial forecasts
CitationWhile the headwinds weighing on domestic demand have eased, the new obstacles are having a greater impact on foreign demand.
Against a backdrop of global growth that has been surprisingly resilient, Western European economies are showing resilience, albeit at varying rates. The economies at the core of the Eurozone, particularly Germany, are showing sluggish growth at best, while the Iberian economies are being buoyed by strong private consumption and investment, the latter supported by funds from the European Recovery and Resilience Plan. In the United Kingdom, growth was the strongest among the G7 countries in the first half of the year, but with modest growth in private consumption and a decline in investment. The pace of growth has slowed significantly since the pandemic, and the UK economy has yet to return to its trend GDP level or growth rate. In contrast, the Eurozone has now recovered the growth lost during the Covid shock and its growth rate has returned to its (low) pre-pandemic potential.
This pace is ensured by the dynamism of labour supply, which is still meeting demand despite the slowdown in the cycle. The resilience of employment is essential to maintaining this narrative of cautious optimism. However, the latter is also supported in the Euro area by a more favourable economic policy stance and by the recovery in the credit cycle, which is fuelling the revival of investment. In the United Kingdom, on the contrary, persistently high inflation is forcing the central bank to halt its easing process, even as fiscal policy becomes more restrictive and the unemployment rate is expected to rise.
The risks to our scenario of accelerating growth in the Euro area and a moderate slowdown in the United Kingdom are skewed to the downside. Although the EU and the UK have benefited from the most favourable terms among the new tariffs imposed by the United States on its trading partners, these remain punitive and uncertainty about future relations with the United States remains, with the confrontation with the Trump administration being hybrid and multifaceted, and potentially spreading to other fronts (FDI, digital services, financial stability, defence). Furthermore, the risk of Chinese trade flows being diverted from the American continent to Europe is emerging as the main deflationary threat to the continent.
Euro area – A resilience stress test so far successful
Despite sluggish consumption and a more unfavourable external environment, the Euro area recovery is continuing. Investment is expected to be the driving force behind the acceleration in growth, supported by European funds, defence spending and German public spending.
Paola MONPERRUS-VERONI – Euro area Manager
France – Political instability takes hold, activity holds up
Growth surprised to the upside in the second quarter of 2025 and activity is expected to continue to grow moderately in the second half of the year. Despite the possible wait-and-see effects generated by uncertainty on the behaviour of private agents, activity is expected to accelerate on an annual basis in 2026. The trend will be driven by the impacts of German government measures and the increase in EU defence spending, as well as by an acceleration in private consumption and the resumption of business investment domestically.
Marianne PICARD – France Economist
Italy – An illusion of resilience
In an uncertain international environment, the Italian economy is struggling to regain momentum. Growth forecasts for 2025 have been revised downwards, reflecting the growing impact of US tariffs on exports. Despite ongoing difficulties in the industrial sector, investment remains surprisingly robust in 2025. Consumption remains the weak link, hamperedby a less dynamic labour market and purchasing power that is still under pressure. For 2026, we expect a slight acceleration in growth, which will benefit, among other things, from the fiscal spillovers of the German Plan, whose knock-on effects will gradually support Italian economic activity.
Sofia TOZY –Italy, Scandinavian countries Economist
Spain – Growth refuses to slow down
Rising wage costs, inflation contained by margin compression, and the gradual moderation of public investment define Spain's new economic framework. Domestic demand remains the primary driver of activity, supported by the resilience of private consumption and the dynamism of residential and productive investment, whilst public consumption maintains a moderate growth profile. External demand, weakened by the slowdown in global trade and the softening of goods exports, will limit its contribution to GDP, despite the persistent strength of services. The Spanish economy is thus entering a phase of growth more in line with its potential, characterised by a gradual normalisation of expansion rates.
Ticiano BRUNELLO – Spain, Portugal, Greece Economist
United Kingdom – More fiscal pain to come
After a relatively strong first half of the year, the British economy is losing momentum. Household consumption growth is weak, and its fundamentals will be less favourable in the future. Households will need to rely more on their savings to maintain spending. The labour market is deteriorating and is therefore less conducive to wage increases. The government is expected to announce further tax increases in the Autumn Budget. The context remains inflationary, and the BoE is concerned about rising household inflation expectations. Future rate cuts may have to wait.
Slavena NAZAROVA – United Kingdom, United States Economist
