Euro Area GDP

Economy shrinks due to Irish GDP revision in Q1

Economic contraction surprises markets: The euro area's GDP was down 0.2% on a seasonally adjusted quarter-on-quarter basis in Q1, following 0.2% growth in the prior quarter. Q1's reading was the weakest since Q2 2020 during the pandemic and surprised markets to the downside, as the flash estimate had penciled in a mild expansion. That said, the discrepancy between the flash estimate and the latest release was due to a large downward revision to Irish GDP growth figures, which tend to be volatile and a poor indicator of underlying economic health due to the presence of multinational firms. Excluding Ireland, GDP grew by 0.3% sequentially. In working-day and seasonally adjusted year-on-year terms, the economy expanded 0.3% in Q1, following a 1.2% expansion in the prior quarter.

Domestic demand eases: Compared to the prior quarter's data, figures in Q1 softened for private consumption (+0.2% in seasonally adjusted quarter-on-quarter terms vs +0.4% in Q4), government consumption (+0.5% vs +0.6% in Q4) and fixed investment (-0.3% vs +0.8% in Q4). In contrast, readings picked up for exports of goods and services (-0.2% vs -0.6% in Q4) and imports of goods and services (+0.5% vs +0.3% in Q4). Looking at the major regional economies, France contracted, while the Netherlands and Spain lost momentum. In contrast, Germany’s economy picked up, and Italy continued to grow at the same rate as in the prior quarter.

GDP to rebound: Looking at Q2, our Consensus is for the economy to rebound. Exports and fixed investment growth should support GDP growth, with the latter boosted by Germany’s large fiscal package. On the other hand, private consumption growth is expected to wane, as the Iran energy shock has stoked inflation, choking off households’ purchasing power and hurting industry. The evolution of peace talks between the U.S. and Iran is key to monitor.

Panelist insight: Commenting on the outlook for this year, Holger Schmieding, chief economist at Berenberg, stated: “The Iran war will hurt in 2026. If the Strait of Hormuz reopens from June onwards, the Eurozone can still achieve growth of 0.6% in 2026 followed by a gain of 1.3% in 2027 and a cyclical peak of 1.6% in 2028. Past ECB rate cuts and higher government spending on defence will support domestic demand in 2026 and help to partly offset the damage from the Iran war supply shock. We expect GDP growth to rebound from late 2026 onwards.” Analysts at the Kiel Institute for the World Economy added: “GDP growth is likely to slow markedly in the current year […]. However, the extent of the slowdown is overstated by the specifics of the sharp swing in growth in Ireland […]. Private consumption is supported by a robust labor market and further increases in real wages. Uncertainty is still dampening private investment initially, but funds from the Recovery and Resilience Facility are stimulating public investment, particularly this year. Fiscal policy is likely to be expansionary in 2026 and broadly neutral in 2027, while monetary policy should remain accommodative despite the modest rise of interest rates.”

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