Economic activity records best reading since Q2 2022 in Q1

GDP rebounds in Q1: According to a preliminary reading, economic activity bounced back after three quarters of contraction, growing 0.2% on a seasonally and calendar-adjusted quarter-on-quarter basis in Q1 (Q4 2024: -0.4% qoq s.a.) and marking only the second expansion in nearly three years. On an annual basis, GDP dropped 0.7% in Q1, improving from the previous period's 0.9% fall and marking the best result since Q1 2023.

Exports drive the rebound: The main driver of the sequential rebound was exports of goods and services growth, which hit an over two-year high of 1.4% in the first quarter (Q4 2024: -2.9% qoq s.a.), likely boosted by a recovery in the German economy and front-loading ahead of U.S. tariffs. On the domestic front, household spending growth ebbed to 0.1% in Q1 compared to a 0.3% expansion in Q4, as higher inflation weighed on households’ budgets. Moreover, government consumption growth was the slowest since Q3 2024 at 0.4% (Q4 2024: +0.5% qoq s.a.), and fixed investment dropped 0.1% in Q1 (Q4 2024: +0.4% qoq s.a.).

Economy to broadly stagnate in 2025: Our Consensus is for sequential growth to hover around Q1 levels in the next quarter, supported by lower interest rates. However, in 2025 as a whole, the economy is expected to flatline after having contracted in 2023–2024. Fiscal consolidation is set to hamper public spending growth and exports should remain in the doldrums amid a still-weak German economy and U.S. import tariffs. That said, ECB rate cuts will drive improvements in the readings for private consumption and fixed investment. Sharper-than-expected fiscal austerity is a downside risk.

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