Economic Slump Looming in Europe: Does theCurrent Recovery Already Show Signs of Faltering?
Eurozone Economy Grows Modestly Amid Trade Uncertainty
The Eurozone economy grew very modestly in the second quarter of 2025, with GDP rising by just 0.1% quarter-on-quarter. This marks the weakest growth since Q4 2023 and a slowdown from 0.6% in Q1. Year-on-year growth was 1.4%, slightly below Q1’s 1.5%.
The slowdown was particularly evident in key countries such as Germany and Italy, both of which saw GDP contract by 0.1% quarter-on-quarter, a downturn from their respective 0.3% growth in Q1. Spain, however, continued to grow moderately at 0.7%, up slightly from 0.6% in Q1, indicating stronger performance compared to Germany and Italy.
The wider European Union (including non-Eurozone members) grew 0.2% quarter-on-quarter, slightly faster than the Eurozone overall.
Employment in the Eurozone and EU rose by 0.1% in Q2 and by 0.7% year-on-year, indicating labor market resilience despite slow GDP growth. The Eurozone unemployment rate remained relatively stable at around 6.1% in early 2025, slightly higher than the EU average of about 5.7%, reflecting some labor market differences within the union.
The sluggish growth can be attributed to cautious business sentiment amid ongoing trade uncertainty and influences from external factors like US trade policies. However, there are signs of improvement, with portfolio flows into Europe picking up and increased public investment, driven by the NGEU programme and Germany's infrastructure plan, expected to support medium-term growth.
In the industrial sector, Ireland saw the steepest drop in production, with a monthly decrease of -11.3%. However, Belgium, France, and Sweden posted notable gains.
The United States economy bounced back strongly, posting a 0.7% quarterly expansion. On an annual basis, eurozone GDP rose 1.4%, while the US GDP rose 2.0%.
Looking ahead, Goldman Sachs remains constructive on Europe’s medium-term outlook, forecasting euro area growth above consensus for 2025-2028. The euro has strengthened notably against the dollar, and growth was more robust in Eastern Europe, with Romania and Poland expanding by 1.2% and 0.8%, respectively.
Efforts to deepen the single market are seen as vital steps to unlocking future growth. Europe remains a global leader in pharmaceuticals, and Germany has announced a €500bn infrastructure plan. Goldman Sachs has upgraded its euro area growth forecast for 2027 by 1.2% since the start of the year.
In conclusion, while the Eurozone economy exhibited very weak growth in Q2 2025, there are signs of improvement. Germany and Italy underperformed in this quarter, with slight GDP contractions, while Spain showed healthier growth above the Eurozone average. The overall Eurozone economy reflects cautious business sentiment amid ongoing trade uncertainty and influences from external factors. However, with increased public investment and efforts to deepen the single market, there is optimism for a stronger recovery in the medium term.
Finance sector growth within the Eurozone was moderate in Q2 2025, still affected by the cautious business sentiment stemming from ongoing trade uncertainty. This uncertain environment has influenced the overall business climate in the Eurozone.
