Euro zone economy expands by better-than-expected 0.4% in the first quarter

The euro zone economy grew by a stronger-than-expected 0.4% in the first quarter, flash data from statistics agency Eurostat showed Wednesday, as global tariff tensions cast uncertainty upon the bloc's trajectory.

Economists polled by Reuters had forecast a 0.2% expansion in the first three months of the year, following a revised 0.2% growth print in the last quarter of 2024.

Figures published earlier Wednesday showed the gross domestic product (GDP) of Germany, Europe's largest economy, rose 0.2% over the same period. French GDP added 0.1% across the three-month stretch.

Continuing a recent trend, southern European and smaller economies outperformed, with the Spanish and Lithuanian GDPs adding 0.6% each, while Italy's economic output grew by 0.3%. The economy of Ireland, which tends to have volatile readings due to its high proportion of multinational companies, expanded by 3.2% in the first quarter.

Franziska Palmas, senior Europe economist at Capital Economics, said the latest euro zone GDP reading showed the area's economy started 2025 on a stronger footing than activity surveys had suggested.

"Nevertheless, we still expect growth to slow sharply in the next six months as the US tariffs introduced in April will hit activity," Palmas said, adding that any boost coming from the huge fiscal stimulus expected in Germany would mostly be felt next year.

The euro was choppy Wednesday, trading 0.08% lower against the U.S. dollar at 10:35 a.m. in London following the print, and 0.2% higher against the British pound. Germany's 10-year bond yield, seen as the benchmark for the euro area, was three basis points lower.

Euro zone economic growth has been lackluster for much of 2023 and 2024, even as the European Central Bank has been cutting interest rates in an effort to stimulate growth and boost economic activity. The ECB's deposit facility rate, its key rate, was taken down to 2.25% earlier this month — down from highs of 4% in mid-2023.

The ECB in March said it was expecting the euro zone economy to grow by 0.9% in 2025, slightly below its January forecast. Fresh projections are due out in June, with central bank policymakers last week suggesting to CNBC that the forecasts would prove crucial in the rate decision-making process.

On the sidelines of the International Monetary Fund World Bank Spring meetings, the policymakers and other economists and officials widely noted the U.S.' tariff policy as a key concern when it comes to growth.

ECB President Christine Lagarde noted that, while the "disinflationary process is so much on track that we are nearing completion," there were shocks that would "dampen" economic growth.

The European Union, which includes the euro zone countries, is facing 20% blanket trade tariffs from the U.S., which has briefly reduced these measures alongside levies on other counterparties until July for negotiations. The EU has also put its own retaliatory measures on hold for now. The bloc is also subject to additional tariffs on steel, aluminum and autos.

Data released on Tuesday nevertheless showed that economic sentiment in the euro area fell in April, hitting its lowest level since December 2024.

While growth has been subdued, euro zone inflation has been nearing the ECB's 2% target, coming in at 2.2% in March. The latest inflation data release is expected later this week.