Digging Into Eurozone GDP

According to last week’s flash estimates, eurozone gross domestic product (GDP, a government-produced measure of economic output) eked out 0.1% quarter-on-quarter growth in Q2—slightly topping expectations.^[i] Not exactly strong, and a bit slower than headline readings elsewhere across the developed world.^[ii] But in our view, a closer look shows that, whilst some long-running issues persisted, there were several pockets of strength or resilience. In concert, we think last Wednesday’s report confirmed what stocks already knew—the eurozone is performing better than widely expected entering 2025.

Domestic demand drove much of Q2’s growth. Take the Iberian Peninsula, where Spain and Portugal led the way, growing 0.7% q/q and 0.6%, respectively.^[iii] On an annualised basis, Spain’s growth rate matched America’s trade-skewed 3.0% headline figure, whilst Portugal’s 2.4% was just behind.^[iv] Per both statistics agencies’ press releases, robust domestic demand (i.e., private consumption, household spending) and investment drove growth.^[v] Similarly, France’s 0.3% q/q rise saw household consumption tick up whilst imports and inventories jumped, potentially reflecting companies’ stocking up in anticipation of continued spending.^[vi]

We think these are notable positives that cut against the negativity we have seen toward the currency bloc in much of the financial commentary we have reviewed this year. At Q2’s start, commentators we follow posited US tariffs’ slowing exports and the tourism season’s winding down would stunt eurozone growth.^[vii] Whilst we always found these predictions a bit overwrought, we think the latest figures suggest growth can come from within, likely quelling the former somewhat. Plus, our research suggests a steepening yield curve—alongside falling political and tariff uncertainty and gridlocked governments across the bloc—should support domestic business investment, another tailwind.^[viii]

Conversely, Irish GDP fell -1.0% q/q in Q2, dragging most on overall results—but we see a key factor worth noting.^[ix] The Ireland Central Statistics Office’s press release noted “the result was mainly driven by a fall in the multinational dominated Industry sector in Q2 2025.”^[x] Some context: Many multinational enterprises (MNEs) call Ireland home for tax purposes, giving them outsized influence over Irish GDP.^[xi] But this doesn’t really reflect domestic economic activity as much as it does, say, pharmaceutical trade with the US. Hence, policymakers and analysts we follow rarely emphasise Irish GDP—opting instead for a bespoke statistic called Modified Domestic Demand (MDD), which strips out MNEs’ effects.^[xii] However, this stat won’t come out until September’s Quarterly National Accounts release.

GDP and MDD can differ greatly, which could be at play here. In Q1, Irish GDP grew a whopping 7.4% q/q whilst MDD grew just 0.8%.^[xiii] Irish multinationals—particularly Pharmaceuticals—saw exports spike, presumably as American businesses sought to front-run tariffs, boosting GDP.^[xiv] So, on a quarter-on-quarter basis, we find it possible Ireland’s GDP drop is masking a healthier domestic economy. Monthly data seemingly point to this: Irish retail sales volumes grew in April, May and June on a month-on-month basis.^[xv] S&P Global’s Irish manufacturing gauge topped 50—indicating expansion—all quarter and into July.^[xvi] Industrial production did, too.^[xvii]

Whilst we can’t know for sure yet, we think this is fairly strong evidence growth is better than GDP implies. Beyond this, commentators we follow have raised many questions around how potential US pharmaceutical tariffs would affect the Irish economy, but that seems like less of a domestic economic issue than it is usually portrayed. The bulk of those companies aren’t homegrown, and we doubt demand would suddenly fall to zero.

Elsewhere, Germany and Italy were the only other detractors amongst the initially reporting nations, both dipping -0.1% q/q.^[xviii] But based on our research, little here presents a negative surprise. Most weakness derived from German manufacturing and Italian agriculture—neither new nor shocking, based on the steady drumbeat of headlines and data alluding to these for years now.^[xix] Notably, though, both countries reported positive domestic demand trends.^[xx] Now, tariffs could have pulled demand into Q1, leaving a pothole in Q2. But then again, Germany’s result extends the streak of alternating growth and contraction that began way back in Q2 2022.^[xxi] Italian agriculture has followed a similar pattern in recent quarters, too, and it is a narrow industry with little footprint in markets.^[xxii] Either way, this looks to us like more of the same for markets, which we think pre-priced all this long ago … and moved on.^[xxiii]

Thus, last week’s report seemingly confirmed what we think eurozone stocks have already shown this year: a better-than-expected economic reality. Our research suggests widespread warnings of trouble erupting from national debt and unstable politics have long dragged on eurozone sentiment, to say nothing of gloomy tariff projections. But with inflation back at prepandemic averages and domestic demand and investment humming, we think conditions look much better than many anticipated at 2025’s start.^[xxiv] In our view, this is a major reason eurozone stocks have outperformed global stocks this year.^[xxv]

Other factors seem to be signalling growth, too. See yield curves across the eurozone’s biggest economies, where German, French and Italian short rates all sit well below long rates.^[xxvi] These curves steepened dramatically in recent months, meaning long rates’ premium over short rates widened.^[xxvii] Banks generally borrow short term to fund long-term loans, so this steepening theoretically promotes bank lending—key to growth, based on our research, especially in loan-reliant Europe—through greater profitability.^[xxviii] This is already showing up in the data, as eurozone commercial and industrial (C&I) loan demand picked up in Q2 whilst credit standards remained mostly unchanged.^[xxix] And loan growth to households and non-financial corporate borrowers has been trending up from almost flat a year ago to 2.2% y/y now—not massive growth, but a noteworthy improvement, in our view. ^[xxx] We think the steeper curve is likely to propel further eurozone loan growth from here, which is already rising toward prepandemic norms.^[xxxi]

Yes, the eurozone economy still has headwinds. Commentators we follow have long warned of potential issues like French or Italian debt and Germany’s sick man moniker, but we think they are old news, faulty and pre-priced into markets ages ago. If they presented substantial risk in the here and now, we doubt eurozone stocks would be leading.^[xxxii]

And whilst headline eurozone growth is tracking below the US (outside maybe Spain), our research suggests Q2’s import plunge is skewing the latter.^[xxxiii] We also find tariffs tend to hurt the imposer more than their target, making them—and a flatter yield curve—relative headwinds for America.^[xxxiv] But our research suggests the eurozone’s fundamentals are stronger than appreciated these days, which we think last week’s release helped confirm.