The eurozone is still heading for a slowdown
8 May 2025
Reading time: 3 min
Despite stronger-than-expected first-quarter growth, the eurozone's economic outlook remains bleak. While inflation figures for April disappointed, falling energy prices are still likely to push headline inflation to 2% before the end of the year, allowing the ECB to cut rates two more times
Peter Vanden Houte
Chief Economist, Belgium, Luxembourg, Eurozone
Section 3
Surprisingly strong growth in the first quarter
Eurozone growth surprised in the first quarter with a 0.4% quarter-on-quarter expansion. We don't yet know all the details of the GDP component, but stronger exports ahead of the US import tariffs were the likely key driver. However, this unusual boost in the first quarter may lead to weaker performance in the subsequent ones. This is already evident in the European Commission’s business and consumer survey, where production expectations in manufacturing fell significantly in April after three consecutive months of increases.
Additionally, as long as uncertainty regarding tariffs persists, companies might delay investment and hiring decisions. Households are also likely to postpone spending on big-ticket items due to increased geopolitical uncertainty. The sharp drop in consumer confidence in April supports this view.
Industry survey signals weaker production growth ahead
Source: LSEG Datastream
Lower energy prices offer welcome support
On the positive side, the drop in energy prices provides welcome support for both businesses and households, offsetting some of the negative impact of the trade war. While we previously downplayed the impact of increased defence spending on GDP growth due to high import leakage and offsetting expenditure cuts, this view has strengthened as some countries attempt to reclassify existing public spending as defence spending.
The German infrastructure package is likely to be a stronger tailwind, though its impact will probably only be felt from 2026 onwards. Overall, we continue to expect economic stagnation in the coming quarters, though a full-blown recession seems unlikely. Due to the stronger carry-over effect from the first quarter, we now project 0.7% growth in 2025. Next year’s growth forecast remains at 1.1%.
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