The Eurozone economy expanded by 0.4% in the first quarter of 2025, marking a notable acceleration from the 0.2% growth recorded in the final quarter of 2024 and surpassing market expectations of a more modest 0.2% gain, according to a preliminary estimate from Eurostat.
Eurozone GDP growth rate beats forecasts
The stronger-than-anticipated performance was underpinned by a rebound in domestic demand, as inflationary pressures continued to ease across much of the bloc, and recent cuts to key interest rates by the European Central Bank began to filter through to consumers and businesses. Lower borrowing costs provided relief to both households and corporates, helping to stimulate spending and investment.
A major contributor to the improved sentiment was Germany’s recent political agreement to temporarily ease its self-imposed fiscal constraints, allowing for increased public investment, particularly in infrastructure and digital transformation. In addition, growing expectations for expanded defense budgets in response to geopolitical tensions—particularly along the eastern flank of the EU—have started to support capital goods orders and forward-looking business confidence indicators.
Tailwinds offseting growing external headwinds
These tailwinds helped offset growing external headwinds, particularly those stemming from the increasingly unpredictable U.S. trade stance. The Trump administration’s latest tariff announcements have rekindled fears of a new transatlantic trade rift, which may erode export competitiveness for key European sectors, particularly automobiles and industrial machinery. While Q1 growth proved resilient, economists caution that the Eurozone’s economic momentum may fade in the coming quarters as the lagged effects of these trade barriers begin to filter through export volumes and business sentiment. Uncertainty surrounding future U.S. trade and industrial policy is already contributing to a more cautious investment environment, particularly among manufacturers and multinational firms.
Among the largest Eurozone economies, Germany posted modest growth of 0.2%, confirming early signs of stabilization after a string of quarters marked by stagnation or contraction. Spain continued to lead the bloc with robust growth of 0.6%, driven by a buoyant services sector and a strong labor market, while Italy posted a solid 0.3% gain, supported by recovering domestic consumption. France and the Netherlands, however, lagged behind, each recording tepid growth of just 0.1%, reflecting weaker industrial output and softer household spending.
What to expect now
Looking ahead, the European Central Bank will likely weigh the mixed signals carefully as it considers its next steps. While the headline growth figure points to resilience, the uneven recovery across member states and the looming risk of external shocks may encourage a cautious approach to further monetary easing.
