Euro Area Sentiment Mixed in May 2025: Services Slump as Industrial & Consumer Outlook Improve

The economic mood in the Euro Area revealed a fragmented outlook in May 2025, as services sector sentiment fell to its lowest level in over four years while industrial confidence and consumer sentiment showed modest but notable gains. According to the European Commission’s latest monthly surveys, the composite Economic Sentiment Indicator (ESI) for the Euro Area rose to 94.8 in May from a downwardly revised 93.8 in April, marking the first increase in three months and surpassing analyst forecasts of 94. Despite the uptick, the indicator remains well below the long-term average of 100, reinforcing concerns that structural weaknesses continue to impede a robust recovery in the bloc.

The services sector, which contributes approximately 70% to the Euro Area’s GDP, emerged as the most pressing concern. The services confidence indicator declined for the fourth consecutive month, slipping marginally to 1.5 in May 2025 from a revised 1.6 in April. This was the weakest reading since April 2021. Although managers’ assessment of the past business situation improved slightly to –2.2 from –4.2, this gain was offset by a decline in evaluations of past demand, which fell to 1.4 from 2.7. More importantly, expectations for future demand deteriorated further to 5.3 from 6.3, and employment expectations also edged lower to 0.2 from 0.5. The downturn in service sentiment signals growing unease about forward-looking demand conditions in areas such as hospitality, real estate, and financial services.

Conversely, industrial sentiment continued its cautious recovery. The Euro Area industry confidence index improved to –10.3 in May from –11.0 in April, its best performance since March 2024 and exceeding market expectations. The marginal increase was underpinned by stronger production expectations, which rose to 1.5 from 0.4, and a slight improvement in order books, which moved up to –24.4 from –25.1. Employment expectations in the sector also improved, shifting to –4.0 from –4.4. Notably, manufacturers’ selling price expectations declined to 7.9 from 10.6, reflecting reduced cost-push pressures amid easing input prices. The uptick in industrial sentiment, while still in negative territory, suggests that supply-side dynamics may be stabilizing, especially in durable goods and intermediate manufacturing segments.

Consumer confidence also brightened slightly in May. The Euro Area consumer confidence index rose by 1.4 points to –15.2 from –16.6 in April, in line with preliminary estimates. A similar improvement was observed across the broader European Union, where sentiment also rose by 1.4 points. The improved outlook was largely attributed to waning pessimism about the general economic situation. Additionally, consumers reported better expectations regarding their household financial situations and indicated increased willingness to make major purchases. However, their perceptions of past financial conditions remained largely static, underscoring that the gains are rooted in expectations rather than realized economic improvements.

Retail and construction sectors followed the broader sentiment trend, showing mild improvements. The retail confidence indicator rose to –7.0 in May from –8.9 in April, buoyed by improved perceptions of the business environment and sales expectations. Similarly, construction confidence improved slightly to –3.6 from –4.1, hinting at resilience in infrastructure and residential building activities despite high input costs and tighter financing conditions.

On the pricing front, the data provided further confirmation that inflationary pressures are easing across the region. Consumer inflation expectations dropped markedly to 23.6 in May from 29.4 in April. This is the steepest monthly decline since the energy shock of 2022 and could signal reduced pressure on the European Central Bank (ECB) to maintain its restrictive policy stance. Meanwhile, manufacturers’ expectations for selling prices continued to slide, with the index falling to 7.9 from 10.6, indicating a broader normalization of price dynamics within the production sector.

The divergence in sentiment indicators was also evident at the national level. Among the largest EU economies, the ESI improved in Germany, rising to 91.5 from 90.0, and in Italy, where it jumped to 98.6 from 95.8. These gains suggest improving business sentiment in two of the Eurozone’s largest industrial bases. In contrast, France saw a decline in its ESI, dropping to 93.1 from 96.6, while Spain’s ESI also edged down to 103.4 from 103.8. Spain continues to outperform its peers, maintaining a sentiment level above the long-term average, likely due to strong tourism and fiscal support.

Several structural undercurrents appear to be shaping the sentiment divergence across sectors. The services sector remains hamstrung by weak external demand, high real interest rates, and subdued business investment, which are weighing on high-contact industries and employment creation. Industrial firms, on the other hand, appear to be benefiting from easing supply bottlenecks, declining input costs, and stabilizing global trade flows. Consumer optimism is also partly supported by declining inflation expectations and improvements in labor market conditions in key economies such as Germany and the Netherlands.

However, the continued underperformance of the services sector poses a significant downside risk to the Euro Area’s near-term recovery prospects. Services account for the bulk of value-added and employment in the region, and persistent weakness could spill over into household incomes and broader consumption trends. The ECB may interpret the decline in inflation expectations and service sector sentiment as room to begin a gradual easing cycle, potentially as early as Q3 2025, especially if labor market resilience is maintained.

Looking ahead, the Euro Area economy appears to be at a critical juncture. The improving industrial and consumer sentiment suggests that the worst of the cyclical downturn may be over. Yet, the continued deterioration in services sentiment, alongside sub-par overall ESI levels, underscores that any recovery is likely to be uneven and fragile. Policymakers will need to strike a balance between maintaining price stability and supporting aggregate demand. The European Commission’s data reinforces that while green shoots are emerging in some sectors, the broader economic landscape remains clouded by uncertainty.

In summary, the May 2025 sentiment indicators provide a cautiously optimistic picture for the Euro Area. Industrial and consumer segments are on a slow path to recovery, but services—critical for job creation and domestic demand—remain in retreat. Inflation expectations are easing, providing potential policy space, but the recovery will require coordinated monetary and fiscal support, structural reforms, and continued vigilance over geopolitical and financial risks.