The eurozone economy showed a surprisingly robust performance in the first quarter of 2025, with growth primarily fueled by investments and exports. This development strengthens the anticipation that the European Central Bank (ECB) will take a more cautious stance on further rate cuts.
According to Eurostat’s third estimate released on Friday, the gross domestic product (GDP) of the euro area expanded by 0.6% quarter-on-quarter. This marks the fifth consecutive quarter of growth and represents an upward revision from the earlier estimate of 0.3%. Notably, this is the highest growth rate since the third quarter of 2022.
Additionally, the broader European Union also experienced a GDP growth of 0.6% during the first quarter. On an annual basis, the euro area saw a GDP increase of 1.5%, while the EU recorded a growth of 1.6%, following the previous quarter’s growth of 0.3% in the euro area and 0.4% in the EU.
Among member states, Ireland spearheaded the quarterly GDP surge with an impressive increase of 9.7%, followed by Malta (+2.1%) and Cyprus (+1.3%). In contrast, the most significant contractions were noted in Luxembourg (-1.0%), Slovenia (-0.8%), and both Denmark and Portugal (each at -0.5%).
Driving Forces: Investments and Exports
Household final consumption expenditure rose by 0.2% in both the euro area and the EU, reflecting a slowdown from the previous quarter’s increases of 0.5% and 0.6%, respectively. Meanwhile, government final consumption remained steady in the euro area while dropping by 0.1% in the EU, following prior increases of 0.4% and 0.5% in the last quarter of 2024.
Gross fixed capital formation experienced vigorous growth, climbing by 1.8% in both the euro area and the EU, a notable acceleration from previous gains of 0.7% and 0.6%. Exports also rebounded significantly, rising by 1.9% in the euro area and 1.6% in the EU, after marginal growth in the preceding quarter. Imports increased by 1.4% in both regions, recovering from a slight decline of 0.1% observed earlier.
ECB Takes a Cautious Route on Rate Cuts
This robust economic performance was reported just a day after the ECB enacted its eighth rate cut, lowering the deposit facility rate by 25 basis points to 2%. During the press conference, ECB President Christine Lagarde emphasized caution, indicating the Governing Council is well-prepared for existing uncertainties.
The ECB’s macroeconomic outlook remained largely unchanged. Real GDP is projected to expand by 0.9% in 2025, followed by 1.1% in 2026 and 1.3% in 2027. Headline inflation is expected to average 2.0% in 2025, dip to 1.6% in 2026, and return to 2.0% by 2027.
Modest Rise in Employment and Retail Trade Volume
In a separate report, Eurostat noted a 0.2% quarter-on-quarter increase in the number of employed persons in the euro area, slightly revised down from an earlier estimate of 0.3%. Employment levels remained stable across the EU. Year-on-year, employment grew by 0.7% in the euro area and 0.4% in the EU during the first quarter of 2025.
April’s seasonally adjusted retail trade volume displayed a modest rise of 0.1% month-on-month in the euro area and 0.7% in the EU, suggesting early indicators of consumption trends as we move into the second quarter.
July Rate Cut Off the Table
Economists and market analysts quickly responded to Lagarde’s indications alongside the stronger-than-anticipated GDP data. “We no longer expect a July cut,” commented Goldman Sachs economist Sven Jari Stehn, interpreting Lagarde’s remarks as a signal that a pause in rate cuts is now the baseline expectation.
Goldman Sachs anticipates the ECB’s final rate cut will occur in September. They predict a deceleration in economic activity and core inflation that will trend lower than the ECB’s forecasts throughout the summer. ING’s global head of macro, Carsten Brzeski, echoed this sentiment, noting that comments from the ECB’s press conference suggest Board members are not eager to resume rate cuts in July unless trade tensions escalate.
BBVA shared a similar viewpoint, stating: “We now consider the rate-cutting cycle to be at an end at the current level. The ECB appears comfortable pausing unless financial conditions worsen.” Meanwhile, Gian Marco Salcioli, Head of Global Markets Strategy at Intesa Sanpaolo, referred to the ECB’s June decision as a “hawkish cut,” emphasizing the need for prudence given the lessons learned from the pandemic regarding inflation pressures.
Photo credit & article inspired by: Euronews
