European Central Bank — Economic Bulletin (Europe, 2025)

Economic Bulletin Issue 7 / 2025 Contents Economic, financial and monetary developments Summary External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments 1 2 3 4 5 Boxes 1 2 3 4 5 6 7 8 China s growing trade surplus: why exports are surging as imports stall Shifts in OPEC+ behaviour and downside risks to oil prices Car demand in the euro area through the lens of the ECB Consumer Expectations Survey And yet we move: evidence on job-to-job transitions in the euro area Main findings from the ECB s recent contacts with non-financial companies Not all prices disinflate alike: disentangling the dynamics of sticky and flexible-price items The heterogenous transmission of monetary policy to household credit Hitting record highs: unpacking support for the euro Article 1 The 2021-23 high inflation episode and inequality: insights from the Consumer Expectations Survey Box 1 Measuring personal inflation using detailed consumption data from the Consumer Expectations Survey Box 2 Who bears the costs of higher interest rates? A microsimulation using the Consumer Expectations Survey Statistics Economic Bulletin Issue 7 / 2025   Contents 2 2 6 10 17 24 28 37 37 44 49 55 62 67 72 78 83 83 92 96 S1 1 Economic, financial and monetary developments Summary At its meeting on 30 October 2025, the Governing Council decided to keep the three key ECB interest rates unchanged. Inflation remains close to the 2% medium-term target and the Governing Council s assessment of the inflation outlook is broadly unchanged. The economy has continued to grow despite the challenging global environment. The robust labour market, solid private sector balance sheets and the Governing Council s past interest rate cuts remain important sources of resilience. However, the outlook is still uncertain, owing particularly to ongoing global trade disputes and geopolitical tensions. The Governing Council is determined to ensure that inflation stabilises at its 2% target in the medium term. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council s interest rate decisions will be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path. Economic activity The economy grew by 0.2% in the third quarter of 2025, according to Eurostat s preliminary flash estimate published on 30 October. The services sector continued to grow, boosted by strong tourism and, especially, by a pick-up in digital services. According to surveys, the pick-up reflects the fact that many firms have stepped up efforts to modernise their IT infrastructures and integrate artificial intelligence into their operations. Meanwhile, manufacturing was held back by higher tariffs, still-heightened uncertainty and a stronger euro. The divergence between domestic and external demand is likely to persist in the near term. The economy should benefit from consumers spending more as real incomes rise. Unemployment, at 6.3% in September, remains close to its historical low, even though demand for labour has cooled. Households continue to save an unusually large proportion of their incomes, which should give them greater margin to increase spending further. Substantial government expenditure on infrastructure and defence, as well as the Governing Council s past interest rate cuts, should underpin investment. By contrast, the global environment is likely to remain a drag. Goods exports declined from March to August, reversing the earlier frontloading of international trade ahead of announced tariff increases. New export orders in manufacturing point to further Economic Bulletin Issue 7 / 2025   Economic, financial and monetary developments Summary 2 declines. The full impact of higher tariffs on euro area exports and manufacturing investment will only become visible over time. The Governing Council stresses the urgent need to strengthen the euro area and its economy in the present geopolitical environment, and welcomes EU leaders reaffirming this ambition at the Euro Summit on 23 October 2025. Fiscal and structural policies should boost productivity, competitiveness and resilience. It is essential to implement the European Commission s competitiveness roadmap swiftly. Governments should prioritise growth-enhancing structural reforms and strategic investment, while ensuring sustainable public finances. It is also vital to foster further capital market integration by completing the savings and investments union and the banking union to an ambitious timetable, and to rapidly adopt the regulation on the establishment of a digital euro. The Governing Council is committed to making retail and wholesale central bank money fit for the digital age. In this vein, the Governing Council decided at its meeting on 30 October 2025 to move to the next stage of the digital euro project. This will ensure technical readiness for potential issuance and support Europe s digital sovereignty once the legislation has been adopted. The details of this decision are available in a related press release.1 Inflation Annual inflation increased to 2.2% in September 2025, from 2.0% in August. This was mainly because energy prices fell by less than before. Energy price inflation was -0.4% in September, up from -2.0% in August. Meanwhile, food price inflation eased to 3.0% in September, from 3.2% in August. Inflation excluding energy and food rose to 2.4%, from 2.3% in August, as services inflation ticked up from 3.1% to 3.2%, while goods inflation was again unchanged at 0.8%. Indicators of underlying inflation remain consistent with the Governing Council s 2% medium-term target. While firms  profits are recovering, labour costs are set to moderate further owing to rising productivity and an easing in wage growth. Forward-looking indicators, such as the ECB s wage tracker and surveys on wage expectations, point to slower wage growth over the remainder of 2025 and the first half of 2026. Most measures of longer-term inflation expectations continue to stand at around 2%, supporting the stabilisation of inflation around the Governing Council s target. Risk assessment The EU-US trade deal reached over the summer, together with the announced ceasefire in the Middle East and progress in the US-China trade negotiations, have mitigated some of the downside risks to economic growth. At the same time, the still 1 See  Eurosystem moving to next phase of digital euro project , press release, ECB, 30 October 2025. Economic Bulletin Issue 7 / 2025   Economic, financial and monetary developments Summary 3 volatile global trade environment could disrupt supply chains, further dampen exports, and weigh on consumption and investment. A deterioration in financial market sentiment could lead to tighter financing conditions, greater risk aversion and weaker growth. Geopolitical tensions, in particular Russia s unjustified war against Ukraine, remain a major source of uncertainty. By contrast, higher than expected defence and infrastructure spending, together with productivity-enhancing reforms, would add to growth. An improvement in business confidence could stimulate private investment. Sentiment could also be lifted and activity spurred if the remaining geopolitical tensions diminished, or if the remaining trade disputes were resolved faster than expected. The outlook for inflation continues to be more uncertain than usual on account of the still volatile global trade policy environment. A stronger euro could bring inflation down further than expected. Moreover, inflation could turn out to be lower if higher tariffs lead to lower demand for euro area exports and induce countries with overcapacity to further increase their exports to the euro area. An increase in volatility and risk aversion in financial markets could weigh on domestic demand and thereby also lower inflation. By contrast, inflation could turn out to be higher if a fragmentation of global supply chains pushed up import prices, curtailed the supply of critical raw materials and added to capacity constraints in the domestic economy. A boost in defence and infrastructure spending could also raise inflation over the medium term. Extreme weather events, and the unfolding climate and nature crisis more broadly, could drive up food prices by more than expected. Financial and monetary conditions Since the last monetary policy meeting of the Governing Council on 11 September 2025, market rates have remained broadly unchanged. The past interest rate cuts have continued to reduce bank lending rates for firms, which averaged 3.5% in August. Meanwhile, the cost of issuing market-based debt remained at 3.5% in August, as the longer-term yields on which such debt is priced have been relatively stable. The annual growth rate of bank lending to firms edged down to 2.9% in September, from 3.0% in August. At the same time, corporate bond issuance slowed to 3.3% on a yearly basis. According to the October 2025 bank lending survey for the euro area, credit standards for business loans tightened moderately in the third quarter, as banks became more concerned about the risks faced by their customers. Firms  demand for credit picked up slightly. The average interest rate on new mortgages has barely changed since the start of 2025 and stood at 3.3% in August. Growth in mortgage lending ticked up to 2.6% in September, fr