Euro area economic sentiment at five-month high

The Economic Sentiment Indicator (ESI) in the Euro Area rose by 1.6 points to 95.8 in July 2025, marking its highest reading in five months and exceeding market expectations of 94.5, according to the European Commission.

The improvement suggests a cautiously optimistic shift in business and consumer sentiment across the bloc, as inflation pressures continue to ease and labor markets remain relatively stable. Although the ESI remains below its long-term average of 100, the July reading reflects a growing sense of stabilization after months of subdued economic activity and geopolitical uncertainty.

The rise in sentiment was broad-based, with most sectors recording gains. Industry confidence improved to -10.4 from -11.8 in June, supported by a better outlook for production expectations and a slight reduction in order book pessimism. The services sector—the largest contributor to Euro Area GDP—continued to strengthen, with confidence climbing to 4.1 from 3.1, reflecting improved demand conditions and more favorable assessments of recent business activity.

Retail trade sentiment also gained ground, rising to -6.7 from -7.6, as easing input costs and stabilizing consumer demand contributed to a more positive outlook. Consumer confidence edged up as well, improving to -14.7 from -15.3. While still deeply negative, the gain indicates slightly less pessimism among households amid signs of slowing inflation and resilient employment.

On the downside, construction sentiment slipped marginally to -3 from -2.9, underscoring persistent challenges such as high financing costs, labor shortages, and regulatory delays—particularly in housing and infrastructure development.

At the national level, sentiment improved notably in several of the Euro Area’s largest economies. France saw the largest gain (+2.4), driven by improvements in industry and services, followed closely by Spain (+2.2), where strong tourism activity and solid retail trade figures lifted confidence.

Germany, Europe’s industrial powerhouse, posted a smaller yet significant increase (+1.2), suggesting tentative stabilization after prolonged weakness in manufacturing. Italy recorded a more modest rise of +0.4, weighed down by stagnant construction and lingering uncertainty in consumer behavior.

Conversely, sentiment was virtually unchanged in the Netherlands (-0.2), where subdued exports and energy price concerns dampened business optimism. Meanwhile, Poland—though not part of the Euro Area—registered a notable decline of -2.1, reflecting broader concerns around political uncertainty and inflationary stickiness in Central and Eastern Europe.

Overall, the July ESI report suggests that while the Eurozone economy remains in a delicate phase, sentiment is gradually turning more constructive. If sustained, this momentum could support a modest recovery heading into the second half of 2025. However, much will depend on the trajectory of monetary policy, external trade headwinds—including those related to new US tariffs—and the pace at which real incomes and investment conditions improve.