Europe faces economic health check as ECB meets on rates

Europe is set for a rigorous economic check-up this week, with key data offering insight into how US tariffs are affecting growth and inflation as the European Central Bank (ECB) convenes to set interest rates.

The main focus will be the initial estimate of euro zone GDP for the third quarter on October 30, due just before the ECB concludes its two-day policy meeting in Florence. Analysts expect the bloc to repeat the modest 0.1% expansion seen in the previous quarter, with national data from major economies adding context, Bloomberg writes. 

The inflation release on October 31 will be closely watched too, with a dip to 2.1% from 2.2% forecast. The ECB will also issue its Bank Lending Survey to gauge how effectively monetary policy is reaching the real economy.

The figures follow a turbulent first half of 2025. Growth surged early in the year as firms raced to beat April’s US tariffs, only to falter later — notably in Germany, where output fell 0.3% in the second quarter. The latest readings will show how businesses and consumers are coping with the EU-US deal setting a 15% levy on most goods leaving the bloc.

“Consumer confidence remains subdued despite a robust labor market, and GDP figures will reveal whether the recovery in private consumption anticipated by the ECB continues to fail to materialize,” said Christian Keller, head of economics at Barclays. “Against the backdrop of weak domestic demand, external headwinds, and low capacity utilization in the manufacturing sector, we also see the risk that investment activity will only recover gradually.”

The ECB is widely expected to keep borrowing costs unchanged at 2%. With inflation near target and growth forecasts improving toward year-end, policymakers are likely to maintain rates at current levels for an extended period.

Recent business surveys offered signs of resilience, as euro-area private-sector activity hit its highest level since May 2024, led by Germany’s infrastructure and defense spending plans, while France continued to struggle with political instability.

“We should take PMIs with caution,” said Ruben Segura-Cayuela, Bank of America’s head of Europe Economics Research. “They have sent false signals before. But they are consistent with still a struggling manufacturing sector and, in the case of Germany, supportive domestic demand dynamics at the start of the fourth quarter.”

Germany remains under scrutiny as Chancellor Friedrich Merz seeks to revive an economy that has contracted for two years. The Bundesbank has warned that third-quarter output “is likely to flatten at best,” with another decline potentially triggering a new recession. France, meanwhile, faces pressure to rein in its widening budget deficit.

“I expect growth to pick up in the fourth quarter and the strong October PMI print has reinforced that expectation. But if I had to think of a catalyst that will weigh on sentiment in the fourth quarter, I think it would be France,” said Soeren Radde of Point72. “The other risk is that I don’t really see a catalyst for an improvement in the German industry until next year, until the fiscal stimulus kicks in, which I think will take some time.”

A slowdown in inflation would affirm the ECB’s view that price growth is near target. Markets are watching for signs of a further dip that could reopen debate about rate cuts.

“Inflation momentum is waning and markets see inflation risks as firmly to the downside,” said Katharine Neiss, chief European economist at PGIM Fixed Income, adding there’s a risk inflation could “get stuck” below 2% in 2026.

By Sabina Mammadli