Europe close: Stocks start week on the front foot

European shares finished higher even as the European Commission tipped a prolonged recession for Germany and investors looked ahead to a critical US inflation reading and an interest rate decision from the European Central Bank (ECB) later in the week.

The pan-European Stoxx 600 gained was up 0.34% at 456.21 after a run of losses during the previous week.

Milan's FTSE Mib fared best, climbing 1.03% to 28,525.10, while the Ibex 35 in Madrid added 0.75% to 9,435.20.

US consumer prices data for August was due on Wednesday and the outcome of the ECB's policy meeting would follow on Thursday.

In economic news, Germany looked set to be the only major European economy to experience an economic contraction this year, according to new forecasts from the European Commission.

Europe’s largest economy was now expected to post a 0.4% fall in economic activity this year, compared with a prior forecast of 0.2% growth made in May. It also cut its growth expectations for Germany in 2024, to 1.1% from 1.4%.

“Interest rate debates remain a central plank in investor thinking, with more inflationary data to come this week which could move the needle," said Interactive Investor head of markets Richard Hunter.

"While US markets remain comfortably ahead this year, there has been a slow downward glide path since August, when the relenting resilience of the economy led investors to the conclusion that further interest rate hikes could be on the horizon."

"At the current time, it is almost universally expected that there will not be a change this month, with the consensus evenly split between a pause and a further hike in November."

In equity news, UK housebuilder Vistry surged after announcing it would merge its home building and partnership operations and set new medium-term earnings forecasts.

Peers Barratt, Persimmon and Taylor Wimpey were all up on improved sentiment after an article in The Times suggested that Labour was set to announce new housing policies to help first time buyers.

Covestro shares jumped after the German chemicals firm said late on Friday it had entered into open-ended discussions with suitor Abu Dhabi National Oil Company (ADNOC) over a takeover approach.