Eurozone economy posts 0.1% Q2 growth despite global trade instability

The Eurozone economy slowed sharply in the second quarter of 2025, growing just 0.1%, according to figures released Wednesday by Eurostat.

The number beat the flat outlook that economists surveyed by Reuters had predicted, but still reflected the impact of weakened trade flows and rising tariff pressures. Growth had come in at 0.6% in the first quarter, driven largely by American firms rushing to import goods before new U.S. duties took effect.

Trade tensions between Washington and Brussels have been the biggest drag on momentum. Donald Trump’s reciprocal tariffs, first rolled out in April, set the tone for the quarter.

While some levies were rolled back during ongoing talks, new sector-specific duties on items like automobiles, aluminum, and steel remained in place throughout the period. The latest EU-U.S. trade agreement imposes a 15% tariff on most European imports.

Some products will avoid duties, and tariffs on cars have been scaled back to their base rates, but the overall uncertainty has left businesses across Europe exposed.

Jack Allen-Reynolds, deputy chief Eurozone economist at Capital Economics, said, “The slowdown in euro-zone GDP growth in Q2 came as no surprise as the boost from tariff front-running waned.”

He explained that the temporary strength in Q1 came from U.S. buyers stockpiling early to dodge future tariffs. Jack added, “The euro-zone has been resilient to the shifts in US trade policy so far… the impact of trade policy uncertainty has seemingly been limited so far.”

Germany contracts, Spain and France outperform

Data from Destatis, released the same day, showed that Germany, the region’s largest economy, contracted 0.1% in Q2. That matched forecasts and marked a drop from its 0.3% expansion in Q1. Construction and industrial investment fell over the quarter, while consumer and public spending edged up. This weak showing is just the latest in a long string of poor performances for Germany, which has struggled to regain solid footing for over three years.

In contrast, France delivered 0.3% growth, outperforming the 0.1% expected. Spain, one of the eurozone’s more stable economies in recent years, clocked in at 0.7% growth, an increase from the 0.6% posted in the first quarter. That divergence highlights the growing imbalance across the region, as more industrial export-heavy economies like Germany face pressure, while others with stronger domestic demand show resilience.

“The return to growth [in Germany] and a strong economy remains a long and complicated project,” said Carsten Brzeski, global head of macro at ING. German Chancellor Friedrich Merz recently announced a plan to loosen the country’s borrowing limits to free up €1 trillion for investment. The idea is to jumpstart the economy after years of sluggish performance, but results could take time.

Tariffs and rate uncertainty weigh on outlook

With the trade fight dominating the backdrop, Riccardo Marcelli Fabiani of Oxford Economics said growth “suffered only a limited setback due to the payback from tariff frontloading.” He also warned that “this will make ECB policymakers more reluctant to cut.” Market expectations for another interest rate reduction this year have cooled. Traders now assign a 50-50 chance that the European Central Bank will deliver another quarter-point cut by October.

ECB President Christine Lagarde said the economy had done “slightly better than the central bank had expected so far this year,” calling the Eurozone’s position “a good place.” That comment came before the Q2 numbers dropped, but it gives a window into the ECB’s thinking as the year progresses.

The euro held steady at $1.155 after the data was published. French and German 10-year bond yields barely moved, both inching up by less than a basis point, showing little investor reaction in the fixed-income markets.

Ulrich Kater, chief economist at Deka Bank, pointed to Germany’s weak performance versus its peers. “As the dust of the tariff explosion gradually settles over the course of the year, it will become clear that economic momentum in Germany remains weak, especially in comparison with many European neighbours,” he said.

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