European Macro Newsletter

Executive Summary

The Eurozone is entering Q4 2025 with clearer signs of cyclical improvement. Composite PMIs have firmed above 52, supported by a steady recovery in real disposable income and a turning inventory cycle. GDP is now tracking 0.4–0.5% QoQ, well above the ECB’s earlier expectations.

Monetary policy remains in “wait-and-watch” mode: the ECB is firmly on hold at a 2.00% deposit rate, with a high bar for further action. Inflation is close to target, labour markets remain resilient, and financial conditions are stable.

Italy’s macro picture remains slower-moving. Confidence data show a gradual but uneven improvement: consumer sentiment is inching back, construction remains historically strong, but manufacturing continues to struggle with global overcapacity and the post-Superbonus drag. Domestic demand is improving, but overall GDP growth remains modest.

1. Eurozone Outlook – Growth Rebounds into Year-End

1.1 Activity: Stronger Momentum Across Leading Indicators

October’s composite PMI rose to 52.5, the highest since May 2023, pointing to a meaningful pickup in activity. The recovery is broad but not uniform:

• Spain leads with a PMI of 56.0,

• Germany shows a 1.9-point improvement,

• France lags, falling to 47.7.

This improvement aligns with a 0.4–0.5% QoQ GDP expansion in Q4 2025, supported by:

• recovering real incomes,

• resilient employment,

• stabilising manufacturing after a three-year contraction,

• easing uncertainty around US tariffs.

GDP in 3Q25 already surprised to the upside at +0.2% QoQ, above the ECB staff’s 0.0% projection.

1.2 Manufacturing: First Signs of a Turning Point

The manufacturing PMI returned to the 50 threshold—the first expansionary reading (excluding August’s blip) since June 2022. Inventory dynamics, as shown in the charts on page 2, confirm early evidence of a turning cycle in finished-goods stocks, supporting forward production.

Euro-coin and the European Commission’s sentiment index both show steady gains, reinforcing the probability of stronger short-term output.

1.3 Policy Implications

The improvement in real activity, combined with inflation hovering close to 2%, leaves the ECB firmly on hold. The expected Q4 rebound reduces the urgency for additional easing. A mild fiscal expansion in 2026 and lower rates already in place should support activity into next year.

2. European Central Bank – “Owls Watching the Horizon”

The ECB’s October meeting delivered no surprises. Using President Lagarde’s metaphor, the “owls” continue to scan the horizon but have not identified any material new risks.

2.1 Policy Stance: Solidly on Hold

Rates remain unchanged for a third consecutive meeting:

• Deposit facility: 2.00%

• Main refinancing: 2.15%

• Marginal lending: 2.40%

The Governing Council maintains an implicit easing bias, but the bar for action is higher given improving macro data.

2.2 Growth and Inflation Assessment

The ECB acknowledged:

• GDP data have been stronger than expected (Eurozone +0.2% QoQ in 3Q25).

• Labour markets remain solid, though hiring momentum is cooling.

• Inflation at 2.2% in September remains consistent with target, with underlying inflation moderating.

Risks to activity have eased, especially around tariffs and US-China tensions; geopolitical risks tied to Ukraine remain elevated.

2.3 “Bottom Line”

With macro data improving and inflation stabilised, the ECB is positioned to remain patient. Any future move would likely be a rate cut, but timing remains uncertain.

3. Italy – Confidence Improving Slowly but Recovery Still Fragmented

3.1 Consumer and Business Sentiment: Gradual Normalisation

Italy’s sentiment data show modest improvement:

• Consumer confidence: rose to 97.6 in October (from 96.8).

• Manufacturing confidence: lifted to 88.3, from April’s 85.9 low.

• Retail trade confidence: at 105, stable at a high level.

• IESI sentiment index: increased from 93.7 to 94.3.

The chart on page 1 highlights the long-term stagnation of sentiment since 2023 despite recent upticks.

3.2 GDP Dynamics: Weak Q3, Better Q4

Italy’s GDP was flat in 3Q25, following a modest contraction in Q2 (−0.51% QoQ), approaching technical recession. Indicators point to stabilisation and a likely improvement in Q4, consistent with the Eurozone’s broader recovery.

3.3 Investment Trends: Structural Headwinds After the Superbonus

The fading impact of the Superbonus continues to weigh on dwelling investment:

• GFCF in dwellings: −15.0% YoY in 4Q24, −5.0% in 2Q25, with the drag expected to fade gradually into 2026.

Public investment supported by NGEU-RRF peaked in earlier years and is now weakening as the programme winds down into 2026. Despite this, construction confidence remains near historic highs, as shown in the charts on page 2.

Manufacturing confidence is still constrained by global overcapacity, especially in China, and inventory overhangs.

3.4 Outlook: Modest but Resilient

Domestic demand should improve as incomes rise and monetary easing works through the system. Export dynamics remain challenged, but uncertainty reduction could unlock higher spending and investment.

Overall, Italy is positioned for modest, uneven growth, sensitive to external shocks and policy execution.

4. Macro Conclusions for Investors

The combination of stronger Eurozone activity indicators, stabilising inflation, and a patient ECB suggests a more constructive backdrop heading into 2026. However, divergences remain pronounced across countries and sectors:

• Spain and Germany are driving the recovery,

• France remains weak,

• Italy is improving but structurally constrained.

For asset allocators, the turn in the inventory cycle, resilient labour markets, and improving sentiment indicators are consistent with:

• firmer earnings expectations in early 2026,

• stabilising credit conditions,

• a supportive environment for selective risk exposure.

—

Federico Polese

This newsletter is the intellectual property of 20Quant Srl.

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