The eurozone financial system posted a stronger-than-expected efficiency within the first quarter of 2025, with development largely pushed by investments and exports, reinforcing expectations that the European Central Financial institution (ECB) will undertake a extra cautious strategy to additional fee reductions.
Gross home product (GDP) within the euro space expanded by 0.6% quarter-on-quarter, marking the fifth consecutive quarter of enlargement, in response to Eurostat’s third estimate launched on Friday.
This determine represents an upward revision from the earlier 0.3% estimate and marks the best quarterly development fee because the third quarter of 2022.
For the broader European Union, financial system additionally grew by 0.6% within the first quarter.
On an annual foundation, GDP grew by 1.5% within the euro space and by 1.6% throughout the European Union within the first quarter of 2025. This comes after a quarterly development of 0.3% within the euro space and 0.4% within the EU throughout the closing quarter of 2024.
Amongst member states, Eire recorded essentially the most vital quarterly GDP enhance, surging by 9.7%, adopted by Malta (+2.1%) and Cyprus (+1.3%). On the opposite finish, the biggest contractions have been noticed in Luxembourg (-1.0%), Slovenia (-0.8%), and each Denmark and Portugal (every -0.5%).
Investments and exports drive development
Family closing consumption expenditure rose by 0.2% in each the euro space and the EU, a slowdown from the 0.5% and 0.6% will increase recorded within the earlier quarter, respectively. Authorities closing consumption expenditure remained steady within the euro space however declined by 0.1% within the EU, following respective will increase of 0.4% and 0.5% within the fourth quarter of 2024.
Gross mounted capital formation posted sturdy development, rising by 1.8% in each the euro space and the EU, marking a notable acceleration from the earlier good points of 0.7% and 0.6%.
Exports additionally rebounded, growing by 1.9% within the euro space and by 1.6% within the EU, after recording marginal development of 0.0% and 0.1% within the previous quarter. In the meantime, imports rose by 1.4% in each areas, recovering from the 0.1% decline noticed within the prior interval.
ECB turns cautious on fee cuts
The stronger financial efficiency was launched simply in the future after the ECB introduced its eighth fee reduce within the present cycle, decreasing the deposit facility fee by 25 foundation factors to 2%.
But, throughout the press convention, ECB President Christine Lagarde signalled warning, repeatedly affirming that the Governing Council is in a “good place” to deal with prevailing uncertainties.
The ECB’s macroeconomic projections remained largely unchanged from March. Actual GDP is predicted to broaden by 0.9% in 2025, 1.1% in 2026 and 1.3% in 2027. In the meantime, headline inflation is forecast to common 2.0% in 2025, dip to 1.6% in 2026, and return to 2.0% in 2027.
Employment sees modest uptick, retail commerce quantity edges increased
In a separate launch, Eurostat reported a 0.2% quarter-on-quarter rise within the variety of employed individuals within the euro space, barely revised down from the earlier 0.3% estimate.
Employment remained steady within the EU. 12 months-on-year, employment elevated by 0.7% within the euro space and by 0.4% within the EU throughout the first quarter of 2025.
April’s seasonally adjusted retail commerce quantity rose marginally by 0.1% month-on-month within the euro space and by 0.7% within the EU, providing early indications of consumption tendencies within the second quarter.
July reduce off the desk
Economists and market analysts reacted swiftly to the indicators from Lagarde and the stronger-than-expected GDP figures.
“We now not count on a July reduce,” mentioned Goldman Sachs economist Sven Jari Stehn, decoding Lagarde’s remarks as an indication {that a} pause is now the baseline state of affairs.
Goldman Sachs now sees the ECB’s closing fee reduce happening in September, though it expects financial exercise to melt and core inflation to pattern decrease than the ECB’s forecasts over the summer time.
ING’s world head of macro, Carsten Brzeski, concurred, stating: “Feedback from the ECB’s press convention recommend Board members are in no hurry to chop charges once more on the July assembly – except there’s a new escalation of commerce tensions.”
BBVA echoed the sentiment, concluding: “We now take into account the rate-cutting cycle to be completed on the present stage. The ECB seems comfy pausing from right here except monetary circumstances deteriorate.”
The ECB’s June transfer may be labelled as a “hawkish reduce” by Gian Marco Salcioli, Head of International Markets Technique at Intesa Sanpaolo.
“The pandemic part taught us how little it takes to reignite inflationary pressures,” Salcioli famous, including that “prudence is critical – the tempo of cuts appears to be shifting towards a wait-and-see strategy.”