Despite only limited progress on Europe’s structural challenges, the economy appears to be entering a cyclical upswing. The services sector continues to expand, while manufacturing is slowly emerging from its slump. In January, the PMI manufacturing output component rose above the boom‑or‑bust threshold, accompanied by a notable drop in inventories. Business sentiment regarding the outlook has strengthened, reaching its highest level in nearly four years. Confidence in France has also improved, likely helped by reduced political uncertainty following agreement on the 2026 budget, even though it still targets only a modest reduction of the deficit to 5% of GDP. Germany exited its downturn with 0.2% growth in the fourth quarter of 2025, and the rollout of its expansionary budget should support a further pickup in growth during the year. Still, due to a smaller carry‑over effect, eurozone growth in 2026 is expected to reach about 1.2%, down from 1.4% in 2025.
