Household spending and investment momentum help the single-currency bloc defy global headwinds, setting a steady tone for the year ahead.

The eurozone closed the final stretch of 2025 with a measure of economic resilience that few policymakers would have confidently predicted a year earlier. Output across the 20-nation bloc expanded by 0.3% in the last quarter of the year, bringing annual growth to 1.3% — a modest pace by historical standards, but one that nonetheless exceeded most forecasts and underscored the region’s capacity to withstand an unsettled global environment.

The better-than-expected performance comes after several years marked by overlapping shocks, from energy price volatility and high inflation to geopolitical tensions and a prolonged slowdown in global trade. While the euro area has not returned to the rapid expansion seen in the years before the pandemic, the latest data suggest that growth has become broader-based and less vulnerable to external disruptions.

Domestic demand fills the gap

At the heart of the eurozone’s late-year momentum was domestic demand. Household consumption strengthened as real incomes gradually recovered, helped by easing inflation and steady employment conditions. Consumers, long cautious amid rising prices and tighter financial conditions, showed greater willingness to spend on services and durable goods, providing a reliable anchor for growth.

Investment also contributed positively, particularly in construction, digital infrastructure and energy transition projects. Businesses appeared more confident about medium-term prospects, supported by improved financing conditions compared with the peaks of monetary tightening earlier in the decade. Public investment, including funds linked to European recovery and climate programmes, continued to play a stabilising role in several member states.

This internal engine proved crucial in offsetting a more fragile external picture. Exports remained a weak spot, reflecting subdued demand from key trading partners and ongoing disruptions in global trade flows. Manufacturing-heavy economies felt the drag more acutely, but even there, domestic activity helped cushion the impact.

A patchwork, but fewer weak links

Growth across the eurozone remained uneven, yet the gap between stronger and weaker performers narrowed toward the end of the year. Southern economies benefited from tourism and services, while larger core countries saw incremental improvements in consumption and investment after prolonged stagnation.

Crucially, fears of a broad-based downturn failed to materialise. Labour markets stayed resilient, with unemployment hovering near multi-year lows. Job creation slowed compared with the post-pandemic rebound, but widespread layoffs were avoided, supporting consumer confidence and spending power.

Inflation dynamics also shifted in a more favourable direction. Price pressures eased gradually, allowing households to regain purchasing power without triggering renewed concerns about overheating. This balance has been central to restoring a degree of predictability to economic planning for both families and firms.

Policy backdrop and confidence

The stabilisation of growth has been closely watched by policymakers in Frankfurt and national capitals alike. The European Central Bank’s earlier tightening cycle, once feared to push the economy into recession, appears instead to have contributed to a controlled slowdown followed by a tentative recovery. Fiscal policy, while more constrained than during crisis periods, has remained supportive in targeted areas such as energy security and investment incentives.

Business surveys toward the end of the year echoed the official data, pointing to improving sentiment in services and a tentative bottoming-out in manufacturing. While confidence levels remain below long-term averages, the direction of travel has been encouraging.

Looking ahead with cautious optimism

As the eurozone turns toward 2026, the prevailing mood among economists is one of cautious optimism. Inflation is expected to continue stabilising, easing pressure on household budgets and allowing for more predictable monetary conditions. Labour markets, though no longer tightening rapidly, are forecast to remain robust enough to support consumption.

Risks have not disappeared. Global trade tensions, geopolitical uncertainty and the uneven pace of recovery among major economies continue to cast a shadow over the outlook. Yet the experience of 2025 has shown that the eurozone is less exposed to external shocks than in previous cycles, thanks in part to stronger internal demand and more diversified growth drivers.

For now, the end of 2025 marks a quiet but meaningful milestone: an economy that, while far from booming, has managed to exceed expectations and lay a steadier foundation for the year ahead.