A fragile recovery

Europe enters the final quarter of 2025 toeing the line between stabilisation and stagnation. After years of exogenous shocks, from the pandemic to energy crises, the region is now shaped by more conventional growth drivers. Oxford Economics forecasts eurozone GDP growth of 1.3% this year, before dipping to 0.8% in 2026, as structural challenges continue to weigh on the recovery. Tariff front-loading flattered export figures in the first half of the year, but this effect is expected to unwind in the second half, bringing growth back in line with 2024 levels.

The ECB’s rate-cutting cycle, which delivered eight consecutive reductions in the year to June 2025, appears to have run its course. The deposit rate remains at 2%, and while a final cut before year-end is possible, a hawkish tone at the September meeting suggests the bar for further easing is high. September saw a modest uptick in inflation to 2.2%, as the drop in energy prices became less pronounced. Headline inflation is expected to average 2.1% for 2025, before easing to 1.5% next year, indicating that the scope for further monetary impetus is increasingly limited.

Trade tensions, particularly with the US, are beginning to cast a shadow over exports and will likely weigh on business confidence and investment into next year. For the retail sector, heightened tariffs and regulatory uncertainty may disrupt supply chains and raise the cost of imported goods, especially in categories like apparel, electronics, and consumer durables. Meanwhile, weaker business sentiment may delay expansion plans and inventory restocking, particularly among discretionary and lifestyle brands. While domestic consumption remains relatively resilient, the risk of imported inflation and logistical friction could weigh on retail sales volumes in the months ahead.

Elevated savings and a gradual return to consumer spending

European consumers continue to display caution in their spending habits - a legacy of pricing pressures and post-pandemic frugality. Although inflation has cooled and interest rates show little movement, household savings remain stubbornly elevated. According to Oxford Economics, the eurozone savings rate stood at 14.9% in the second quarter of 2025, down 30 basis points quarter-on-quarter, yet still significantly above the pre-pandemic five-year average of 12.6%. Enduring prudence suggests that although decreasing, savings levels may remain structurally higher than before the pandemic, carving out a new norm.

Even so, there are early signs that consumers are starting to draw down their reserves. Growth in consumer spending is expected to reach 1.3% in 2025 and 1.5% next year, as households gradually regain confidence. At the same time, growth in real disposable incomes is set to moderate. After a strong rebound of 3.3% in 2024, income growth is forecast to slow to 1.6% this year, indicating a move towards more sustainable, albeit slower, gains.

Nevertheless, consumer confidence remains subdued. In September, the Euro Area Consumer Confidence Index inched up to -14.9. However, concerns are mounting over the long-term sustainability of public finances, particularly in high-debt economies such as Italy and France, where prospects of tighter budgets, including potential spending cuts or tax increases, may be weighing on sentiment. Broader geopolitical tensions and softer hiring intentions further temper the outlook, suggesting that while spending is recovering, caution remains the prevailing mood among European households.

Retail sales stabilising just below pre-pandemic norms

Following five years of pandemic-driven volatility, during which retail sales growth averaged 0.8%, growth is expected to stabilise at 2% in real terms this year, before moderating slightly to 1.7% in 2026 and 1.9% in 2027. This rhythm aligns more closely with the five-year pre-pandemic average of 2.5%, albeit with less exuberance. While households remain financially defensive, spending is gradually recovering as savings unwind and inflationary pressures recede.

Portugal (4.8%), Luxembourg (4.4%), and Czechia (4.1%) are projected to lead the growth in 2025, while Spain (4.1%) continues to see gains spurred by tourist activity and local consumption. In contrast, larger Western European economies are treading a more cautious path. Germany (2.7%), France (2.3%) and the UK (0.8%) are expected to post more subdued gains. Italy remains an outlier, with a projected marginal decline of -0.1%, accentuating the uneven pace of continental recovery.

International travel is playing a quiet but meaningful role in supporting retail momentum. According to the European Travel Commission, foreign arrivals are forecast to rise 8% year-on-year and 12% above 2019 levels by the end of 2025. France and Spain are set to retain their status as Europe’s premier destinations, each capturing 13% of total arrivals. Meanwhile, Germany and the UK are expected to dominate the source market, accounting for 18% and 12%, respectively. Increased mobility is further reviving urban retail centres and injecting renewed vitality into discretionary spending categories.

Looking further ahead, retail sales growth is expected to average 1.8% until 2030, a level that suggests not a return to excess, but a new normal. Consumers remain selective, value-conscious, and attuned to trade-offs; however, their spending is proving resilient. As the macroeconomic fog begins to lift, retail appears poised for steady, if unspectacular, progress.

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