GDP records sharpest contraction in two years in Q2

GDP below market expectations: According to a preliminary reading, seasonally and calendar-adjusted quarter-on-quarter GDP declined 0.1% in the second quarter, after a 0.3% expansion in Q1. The decline marked the worst result since Q2 2023 and defied market expectations for growth. On an annual basis, economic momentum ebbed 0.4% in Q2, after a 0.7% increase in Q1, marking the worst reading since Q1 2024.

Net exports weighed on GDP: In the absence of a full breakdown, the statistical office cited net exports as the main drag on growth. That said, it noted that domestic demand contributed positively to headline GDP. On the production side, the industrial and agricultural sectors detracted from the reading, and the contribution of the services sector was null. A complete breakdown will be released on 29 August.

GDP growth to come back in the coming quarters: Our Consensus is for sequential GDP growth to return over H2, as past interest rate cuts should support fixed investment. That said, economic activity will likely remain subdued as the 15% U.S. tariffs on EU products should weigh on the external sector. In 2025 as a whole, economic activity is expected to edge above 2024 levels, supported by stronger private consumption—driven by solid wage growth and lower unemployment—and a rebound in fixed investment, underpinned by lower interest rates and EU funds inflows. That said, the European Commission’s excessive deficit procedure should weigh on government spending growth, keeping the headline improvement quite modest. EU funds absorption is key to monitor.

Panelist insight: Commenting on the outlook, ING’s Paolo Pizzoli stated: “Drawing on available confidence indicators and assuming that reduced uncertainty following the US-EU trade agreement will support domestic demand, we cautiously anticipate a return to marginally positive quarterly GDP growth in the third quarter, with tourism potentially providing an additional lift. Still, risks to our […] forecast for average GDP growth in 2025 are now slightly tilted to the downside.”

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