Eurozone Consumer Confidence Deteriorates as ECB Holds Rates Amid Divergent National Sentiment

1. Eurozone consumer confidence edged lower in December while business sentiment remained mixed across member states, as the European Central Bank held interest rates at 2 per cent and revised inflation and growth projections marginally upward for 2026—painting a picture of cautious optimism tempered by persistent uncertainty.

Consumer confidence in the eurozone fell to minus 14.6 in December, down from minus 14.2 in November, according to flash estimates from the European Commission. The index remains well below its long-term average, suggesting households remain cautious despite easing inflation and economic resilience. In the broader European Union, sentiment declined to minus 13.7.

The deterioration was particularly pronounced in Germany, where consumer sentiment weakened as households grappled with elevated energy costs and structural economic challenges. Italy proved an exception where consumer confidence improved modestly—reflecting more stable food prices and resilient labour market conditions.

Business confidence presented a fragmented picture. French companies reported improving sentiment, driven primarily by services sector resilience. Italy saw business confidence weaken as export-oriented manufacturers faced headwinds from currency appreciation and uncertain external demand. This divergence reflects the increasingly fragmented nature of European economic recovery, with domestic-focused economies proving more resilient than those dependent on external trade.

ECB Maintains Neutral Stance with Upward Revisions

At its December meeting, the European Central Bank kept its three key interest rates unchanged, marking the fourth consecutive pause since June’s cut. The decision was unanimous, with ECB President Christine Lagarde emphasising that monetary policy remains “in a good place”.

The central bank revised its staff projections, showing headline inflation averaging 2.1 per cent in 2025, 1.9 per cent in 2026, 1.8 per cent in 2027 and returning to the 2 per cent target in 2028. The 2026 inflation forecast was lifted from 1.7 per cent in September’s assessment, primarily because staff now expect services inflation to decline more slowly than previously anticipated.

Core inflation excluding energy and food is projected at 2.4 per cent in 2025, moderating to 2.2 per cent in 2026. The upward revision reflects stronger-than-expected wage growth, with compensation per employee rising at an annual rate of 4.0 per cent in the third quarter—above September projections due to payments exceeding negotiated wages.

Economic growth projections were also revised higher. The ECB now forecasts eurozone GDP expansion of 1.4 per cent in 2025, 1.2 per cent in 2026, and 1.4 per cent in both 2027 and 2028. The 2025 upgrade from 1.2 per cent reflects stronger-than-expected third-quarter growth of 0.3 per cent, driven primarily by resilient domestic demand and services sector performance.

Divergent Factors Shape Outlook

The ECB identified several factors supporting the growth outlook, including rising real wages underpinned by robust labour market conditions with unemployment near historic lows at 6.4 per cent. Germany’s infrastructure and defence spending programmes are expected to provide meaningful fiscal impulse beginning in 2026, after implementation delays constrained 2025 disbursements.

However, persistent headwinds remain. Services inflation continues running above 3 per cent, reflecting sticky wage pressures in labour-intensive sectors. The euro’s appreciation against the dollar creates complications for exporters, while elevated economic policy uncertainty weighs on investment decisions.

Consumer expectations surveys reveal households anticipate inflation of 2.8 per cent over the next 12 months, marginally above the ECB’s target. Longer-term expectations remain anchored at 2.5 per cent for three years ahead and 2.2 per cent for five years ahead, suggesting underlying credibility in the central bank’s inflation-fighting credentials.

Policy Implications and Forward Guidance

ECB officials indicated no discussion of either rate cuts or hikes at the December meeting, signalling comfort with the current neutral stance. However, comments from Executive Board member Isabel Schnabel suggesting inflationary risks now exceed downside economic threats sparked speculation about potential rate increases in 2026, with market-implied odds of a hike by year-end hovering around 30 per cent.

The balance of risks tilts toward maintaining rates at current levels throughout 2026. Economists project the ECB will hold at 2 per cent through year-end, with any future moves more likely to be cuts than hikes given inflation projected to run below target for most of 2026 and 2027. Germany’s fiscal expansion could complicate this outlook by adding inflationary pressure, though implementation delays suggest effects will materialise gradually.

The deterioration in consumer confidence despite improving fundamentals reflects elevated uncertainty about the global environment, including US trade policy and ongoing geopolitical tensions. Until households see sustained evidence of economic acceleration translating into tangible improvements in living standards, sentiment is likely to remain subdued—creating a drag on consumption that could moderate the pace of recovery even as monetary and fiscal conditions become more supportive.

Further Reading

Europe’s Economic State: Growth, Risks and Winners — Comprehensive analysis of divergent growth trajectories across European member states and the structural challenges facing the bloc.

Germany’s €1tn Spending Blitz: Key to Europe’s Recovery? — Examination of Germany’s historic fiscal expansion and its implications for eurozone economic growth and ECB monetary policy.

European Business News Digest Q4 2025 — Quarterly roundup of major corporate developments, M&A activity and emerging business trends across European markets.

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