The euro-zone economy is growing at a steady pace. While Spain is still the clear outperformer among the larger countries, Germany has finally returned to growth, but France has stalled. Business surveys suggest that growth in the euro-zone remained resilient in Q3. Meanwhile, the labour market continues to be much less tight than it was back in 2022. Core and services inflation have not risen since the start of the Iran war and we see little risk of second-round effects on inflation via wages. This is a key reason why we think the ECB is unlikely to raise interest rates as far as is discounted in the market, and rate cuts could come onto the agenda later in 2027. Accordingly, we think the Bund yields will fall. But concerns about the public finances in France are likely to grow and so we think there’s a good chance that its government bond spreads will widen further.
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