Economic growth across Europe is showing signs of cautious improvement, with fresh data suggesting the continent is emerging from a prolonged period of stagnation. After several quarters of anaemic performance, the eurozone economy expanded by 0.3% in the first quarter of 2025, marking the region’s strongest showing since early 2023.
Germany, long the engine of the European economy, returned to positive territory with a modest 0.2% quarterly gain. France and Spain recorded stronger growth at 0.4% and 0.5% respectively, while Italy remained flat. Central and eastern European countries, including Poland and Romania, posted above-average gains, buoyed by recovering exports and EU-funded infrastructure spending.
Economists point to a combination of easing inflation, robust labour markets, and tentative consumer confidence as drivers behind the modest rebound. The European Central Bank’s decision to begin gradually lowering interest rates has also played a role, reducing financing costs for households and businesses alike.
“After a long period of stagnation, the green shoots are real,” said Carsten Brzeski, chief economist at ING. “But the recovery remains shallow and uneven.”
One key factor aiding growth has been falling energy prices. After the shocks of 2022–2023, European gas and electricity costs have stabilised, helping manufacturers regain competitiveness. In Germany, industrial production ticked up for the first time in nearly a year, particularly in automotive and machinery exports. However, concerns remain over weak demand from China, a major trading partner.
The services sector has fared better, with tourism-heavy countries like Spain and Greece benefiting from strong early-season travel bookings. Retail spending also showed improvement, particularly in northern Europe, where wage growth has started to outpace inflation.
That said, challenges persist. Youth unemployment remains high in parts of southern Europe, and corporate investment is still lagging in several key economies. The war in Ukraine continues to cast a shadow over eastern trade routes and defence spending.
The ECB, while optimistic, has signalled it will proceed with caution. Its June rate cut was described as “a first step, not a pivot,” and President Christine Lagarde warned that any acceleration in rate reductions would depend on sustained disinflation and wage moderation.
Political risk is also looming. With European Parliament elections behind them, national governments must now navigate increasingly fragmented domestic landscapes. Populist gains in countries like the Netherlands and Slovakia have introduced new uncertainty into economic policymaking, while Brussels eyes stricter fiscal oversight to rein in public debt.
Despite these uncertainties, business sentiment has improved. The eurozone’s Purchasing Managers’ Index (PMI) for May rose above the 50 mark, signalling expansion for the first time in eight months. Consumer confidence, while still below pre-pandemic levels, is trending upwards.
The European Commission recently revised its 2025 growth forecast to 1.2%, up from 0.8%. While not spectacular, the upward adjustment reflects cautious hope that the region has turned a corner.
Europe’s recovery may be slow, but it is no longer stalled. The challenge ahead lies in sustaining momentum and ensuring the benefits reach beyond boardrooms and into everyday lives.
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