Europe’s Resilient Q1 GDP

Far be it from us to agree with any monetary policymaker, but ECB head Christine Lagarde’s verdict on the eurozone’s Q1 gross domestic product (GDP) slowdown and April inflation uptick seem on point: “‘It’s lower growth, granted…but we’re not in stagnation let alone in recession,’ she told reporters. ‘You can imagine scenarios where we’re heading toward those situations. But this is not what we’re seeing for the moment.’”^[i] And as for fears of stagflation, slang for a stretch of high inflation, high unemployment and little to no economic growth? Lagarde prefers to “park” them: “‘We don’t apply “stagflation,” that flashy term, to the circumstances that we have because we really think that it’s associated with the 70s,’ she said.”^[ii]

Yet her fine interpretation of the results appears to be at odds with sentiment, based on the financial news coverage we reviewed, indicating to us eurozone stocks have a nice wall of worry to climb.

We wouldn’t get too hung up on the actual numbers in the GDP report, as they are old news and backward-looking for stocks, which our research finds weigh the next 3 – 30 months. But we did find several interesting nuggets. Headline eurozone GDP slowed from Q2 2025’s 0.2% q/q to 0.1%, which several outlets we reviewed described at a stall, stagnation, what have you.^[iii] But growth is growth, if you will forgive the tautology, and we think eurozone growth isn’t even the most meaningful statistic. It is a mashup of all member states’ growth rates, which we think makes them the more meaningful statistics. Amongst these, most commentators we follow zeroed on France’s slip from Q4’s 0.2% q/q growth to a slight contraction that rounds to zero.^[iv] But elsewhere things looked better to us. Italy slowed from 0.3% q/q to 0.2%, whilst Spain eased from 0.8% to 0.6%.^[v] Both match longer-running trends, which we think cuts against claims that the entire region suddenly weakened when energy costs spiked in March.^[vi]

We think Germany’s results also buck the narrative. GDP growth there sped from 0.2% q/q in Q4 2025 to 0.3%.^[vii] The preliminary report excludes a detailed breakdown, but the Federal Statistical Office’s release noted growing household spending and exports. Whilst the former may seem at odds with March’s sharp retail sales drop, the -2.0% m/m decline was unusually large and the data are subject to revision, so we suggest taking a wait-and-see approach.^[viii] German retail sales also tend to vary on a monthly basis, and one lousy result isn’t automatically a trend.^[ix] Note, too, that S&P Global’s purchasing managers’ indexes for March and April (preliminary) also flagged continued manufacturing and services growth for Germany.^[x] To us, this is a reminder to look at the whole picture, not just one indicator, just as we think eurozone GDP reports are a call to look at the whole map.

But for investors, we think they are also a call to look forward. For all the warnings we have seen that higher energy prices may knock some eurozone economies into recession, we think stocks began dealing with them well before they showed in the data.^[xi] When global markets wobbled after the Iran war and Strait of Hormuz blockade began, eurozone stocks got hit hard.^[xii] Not as hard as the most exposed nations (mostly smaller Emerging Markets in Asia), but they fell more than the MSCI World Index, hitting official correction territory (down -10.4% from 25 February to global stocks’ 27 March low).^[xiii] By mid-April, eurozone stocks were a whisker from prior highs. They have pulled back a bit since but finished April down -3.9% from pre-war highs—not huge.^[xiv] Meanwhile, eurozone gas prices remain well below spring time highs (and miles below 2022’s crisis levels).^[xv] When looking at stock market history we find no recovery moves in a straight line, and this looks to us like markets’ gradually pricing in the region’s adaptation.

Where many headlines portray a weak, stagnating eurozone, we see a headline GDP reading that obscures pockets of weakness and strength. That isn’t new. It is the eurozone’s years-long trend, one we think markets are very familiar with.^[xvi] Our research finds surprises move markets most. Nothing in today’s report appeared to us to be a surprise or sudden shift. We think it mostly represents the status quo—a status quo that backdropped smashing eurozone stock returns last year.^[xvii] Give markets time to move past today’s headlines, and last year’s trends look likely to reassert soon enough. Europe’s wall of worry still appears to us to be higher than the US’s, with more false fear bricks that we can see. In our view, stocks don’t need a perfect economy, just a reality that goes modestly better than investors broadly deem likely.