Euro area GDP is currently estimated to be growing at around 0.2–0.3% quarter-on-quarter, with growth primarily driven by strong domestic demand and services. Manufacturing and industrial production are experiencing variability and weakness, yet analysts believe that fourth-quarter GDP will not be revised down despite December’s soft industrial production numbers.
January’s final Composite PMI data indicates a minor slowdown in economic growth at the beginning of the year, projecting a steady GDP growth rate of about 0.2% quarter-on-quarter for the first quarter. This supports the notion of a two-speed economy, where domestic demand plays a pivotal role. For the euro area, early country data suggests a monthly industrial production decline of -2.3%, influenced by Portugal’s drop of -2%.
Positive Quarterly Rate Amidst Industrial Decline
Even with the considerable decrease in monthly industrial production, the quarterly rate should remain positive. Nonetheless, there is a predicted negative carry-over impact for the first quarter of around -1.3% quarter-on-quarter. Despite weak industrial numbers in December, a revision of the euro area’s fourth-quarter GDP growth seems improbable.
A year ago, back in early 2025, we saw forecasts for slow but steady growth around 0.2% per quarter. The latest data confirms this sluggish trend has continued, with Eurostat’s flash estimate showing the economy grew by only 0.1% in the final quarter of 2025. This persistent low-growth environment suggests that any upside is limited, putting a cap on rallies for index futures like the Euro Stoxx 50.
The narrative of a two-speed economy, which we were watching closely in 2025, has become even more entrenched. January 2026’s flash PMI data showed the services sector expanding with a reading of 51.5, while manufacturing remains in contraction at 48.2. This divergence creates opportunities for pairs trades, such as going long on companies in the resilient services sector while simultaneously shorting those exposed to industrial weakness.
Persistent Weakness in Industrial Production
The weakness in industrial production noted throughout 2025 appears to be carrying over into this year. Data for December 2025 showed another monthly decline of 1.5%, creating a poor starting point for the first quarter of 2026. Derivative traders should consider buying puts on specific industrial stocks or sector ETFs, as this persistent weakness is likely to weigh on their upcoming earnings.
Given that resilient domestic demand is the main pillar preventing a recession, any negative consumer data could significantly shift market sentiment. This fragile stability increases the appeal of buying volatility, as the VSTOXX index could spike on signs of a faltering consumer. The continued economic softness is also firming up expectations for an ECB rate cut, making interest rate futures a key area of focus in the coming weeks.
