Europe’s Resilient Q1 GDP

Far be it from us to agree with a central banker, but ECB head Christine Lagarde’s verdict on the eurozone’s Q1 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 stagflation fears? “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 is at odds with sentiment, indicating 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 weigh the next 3 – 30 months. But there are still interesting nuggets. Headline eurozone GDP slowed from Q2 2025’s 0.2% q/q to 0.1%, which several outlets described at a stall, stagnation, what have you.^[iii] But growth is growth, and eurozone growth isn’t even the most meaningful statistic. It is a mashup of all member states’ growth rates, making them the more meaningful statistics. Among these, everyone 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. Italy slowed from 0.3% q/q to 0.2%, while Spain eased from 0.8% to 0.6%.^[v] Both match longer-running trends, cutting against claims that everyone suddenly weakened when energy spiked in March.

Germany’s results also buck the narrative. Growth there sped from 0.2% q/q in Q4 2025 to 0.3%.^[vi] The preliminary report excludes a detailed breakdown, but the Federal Statistical Office’s release noted growing household spending and exports. While the former may seem at odds with March’s sharp retail sales drop, analysts called the -2.0% m/m inflation-adjusted fall “implausibly weak” and foresee a hefty revision.^[vii] S&P Global’s PMIs for March and April (preliminary) also flagged continued manufacturing and services growth. To us, this is a reminder to look at the whole picture, not just one indicator, just as eurozone GDP reports are a call to look at the whole map.

But for investors, they are also a call to look forward. For all the worries about higher energy prices knocking some eurozone economies into recession, stocks began dealing with them well before they showed in the data. When global markets wobbled after the Iran war and Strait of Hormuz blockade began, eurozone stocks got hit hard. 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 -11.9% from February 25 to global stocks’ March 30 low).^[viii] By mid-April, eurozone stocks were a whisker from prior highs. They have pulled back a bit since but finished April down -3.5% from all-time highs—not huge.^[ix] Meanwhile, local natural gas prices remain well below spring time highs (and miles below 2022’s crisis levels). No recovery moves in a straight line, and this looks to us like markets’ gradually pricing in the region’s adaptation.

Where headlines see a weak, stagnating eurozone, we see a headline reading that obscures pockets of weakness and strength. That isn’t new. It is the eurozone’s years-long trend, one markets are very familiar with. Surprises move markets most. Nothing in today’s report was a surprise or sudden shift. It mostly represents the status quo—a status quo that backdropped smashing eurozone stock returns last year. Give markets time to move past today’s fears, and last year’s trends look likely to reassert soon enough. Europe’s wall of worry is still higher than the US’s, with more “false fear” bricks that we can see. Stocks don’t need a perfect economy, just a reality that goes modestly better than feared.