Europe’s economy grew more strongly than anticipated in the first quarter of the year, official data showed on Wednesday, only to see hopes for an ongoing recovery quickly squelched by the trade war launched by U.S. President Donald Trump.
The world's second-largest economic bloc has barely grown over the past several years as businesses held back investment and households tried to rebuild wealth lost due to high inflation, putting Europe on the back foot even before the latest escalation in trade tensions.
While 2025 was long seen as a key year in its gradual recovery, the outlook turned on Trump's "Liberation Day," and policymakers warn that permanent damage has already been done to the global economy, even if there is an eventual resolution to the tensions.
Gross domestic product (GDP) in the 20 eurozone countries grew 0.4% in the first three months, driven by quick growth in Spain, according to official figures released by the European Union statistics agency Eurostat.
It beat expectations for 0.2% expansion and improved on 0.2% growth in the last part of 2024.
However, the underlying trend was significantly weaker as the data was distorted by a 3.2% expansion in Ireland, driven largely by activity among big foreign companies based there for tax reasons.
Germany, the eurozone’s largest economy and its economic problem child, grew by just 0.2% while France expanded by 0.1% and Italy by 0.3%, suggesting that, excluding Ireland, the bloc was growing close to the 0.2% expected by economists.
But on April 2, just two days after the end of the quarter, Trump announced an onslaught of new tariffs on almost every U.S. trading partner and hit goods imported from the EU with a 20% tariff rate. That has led to widespread downgrading of Europe’s growth outlook for the year since its economy is heavily dependent on exports and the U.S. is its largest single export destination.
Although Trump has announced a 90-day pause on what he calls his "reciprocal” tariffs – so named because they are based on how he feels other countries have been treating the U.S. – prospects that the EU can strike a bargain to reduce the 20% figure are highly uncertain.
Meanwhile, other tariffs – such as a 25% rate on steel and aluminum and on cars, both of them for all trading partners, including Europe, remain in place. The costs of tariffs are paid by the companies that import European goods such as cars and pharmaceuticals, which then have to decide whether to swallow the costs or pass them on to the consumer in the form of higher prices.
As a result, indicators of business and consumer optimism in Europe have fallen. The European Commission’s economic sentiment indicator sagged to 93.6 in March, its lowest level since December. That drop in sentiment is "another illustration of how the last four weeks of tariff tensions and uncertainty have entirely wiped out the tentative return of optimism in the eurozone,” said Carsten Brzeski, global head of macro at ING bank.
"Unless there are major changes in U.S. trade policy, sentiment as well as economic activity in the eurozone will remain subdued over the coming months," Brzeski said.
The European Central Bank (ECB) has already said that on top of the trade war, the financial market turbulence set off by U.S. policies and the general deterioration in sentiment will all dampen growth.
But the bloc was only seen expanding by less than 1% even before Trump's tariff bombshell, suggesting that any other major damage would put it close to a recession.
However, most economists and policymakers say that the U.S. is bound to take a bigger hit than other economies, creating an incentive for the Trump administration to scale back its policies.
Before Trump's announcement, hopeful signs had included a strong job market, with unemployment low at 6.1% and consumers beginning to spend more after several years of holding back because of inflation.
With inflation down to 2.2%, the European Central Bank has been lowering the cost of credit for consumers and businesses by cutting its benchmark interest rate seven times in its current easing cycle, most recently by a quarter of a percentage point on April 17.
On top of that, the German parliament has approved a 500 billion euro ($570 billion) investment fund that’s exempt from the country’s constitutional limits on debt. That decision by the incoming coalition of the center-right Union bloc and the Social Democrats has raised hopes of additional spending on pro-growth infrastructure over the coming years.
However, Trump’s tariffs have lowered expectations for Germany. The outgoing government under Chancellor Olaf Scholz lowered its growth estimate for this year to zero after two previous years of declining output. Parliament is expected to elect center-right Union leader Friedrich Merz as chancellor on May 6 in the wake of a Feb. 23 national election.
