Monthly Bearings: August 2026—Europe’s Growth Recovery Meets a New Set of Constraints

Europe’s recovery is gaining traction through manufacturing, exports, and stronger corporate earnings, while the Rhine River drought, weaker leveraged borrowers, and scarce infrastructure capacity expose persistent vulnerabilities across European credit.

European credit entered the period with improving growth signals but an increasingly clear set of constraints on how far that recovery can extend. Germany recorded a third consecutive quarter of expansion, supported by stronger exports and manufacturing, while second-quarter corporate earnings remained robust among many larger European issuers. At the same time, persistent drought disrupted inland waterways, adding freight and industrial costs just as parts of manufacturing were beginning to recover. Beneath healthier investment-grade fundamentals, European leveraged credit remained more fragile, with downgrades broadening even as headline default rates showed tentative stabilisation.

The month’s connecting theme is the importance…