Europe’s Growth Slows: Is the Recovery Already Losing Momentum?

Eurozone’s Quarterly Performance Remains Flat, with Divergent Outcomes

The latest figures show that the eurozone’s GDP expanded by a mere 0.1% in Q2.

Country‑Specific Trends

• Germany: Shrunk by 0.2%, marking a rare contraction for the powerhouse.
• Italy: Declined by 0.3%, reflecting ongoing growth challenges.
• Spain: Posted a solid 1.5% increase, the strongest performer in the bloc.

Key Takeaways

This pattern indicates a mixed economic environment, with Spain leading while German and Italian economies face headwinds.

Eurozone Economic Growth Slows in Q2 2025

Europe’s economic engine has struggled to keep pace in the second quarter of 2025, with GDP growth barely moving and industrial activity taking a sharp downturn. Reported by Eurostat, the seasonally adjusted regional figure rose a mere 0.1 % from the first three months of June, a change that mirrored the initial estimate. The broader European Union posted a similarly modest 0.2 % uptick, staying in line with former forecasts.

Key Takeaways

• Eurozone GDP (Q2 2025): +0.1 % (unchanged from flash estimate)
• EU GDP (Q2 2025): +0.2 % (consistent with earlier predictions)
• First‑quarter growth (Q1 2025): +0.6 % for the eurozone, +0.5 % for the EU, driven largely by robust export activity
• United States growth (Q2 2025): +0.7 % after a slight contraction in Q1, outpacing Europe
• Annual comparison: Eurozone GDP rose 1.4 % vs. 2.0 % in the U.S.

Context and Implications

These figures suggest a cooling of the recovery that had been bolstered by export momentum during the first quarter. The divergence between European and American expansion rates raises questions about the sustainability of the continent’s rebound, particularly as industrial output in the euro area begins to slow significantly.

Looking Ahead

Analysts will be monitoring how subsequent policy measures and global market trends impact Eurozone growth. The economic outlook remains uncertain as key indicators point toward a potential plateau in overall activity.

Diverging national performances

Eurozone Growth Disparities: Country‑by‑Country Snapshot

The latest quarterly data reveal a patchwork recovery across the bloc. While several member states have shown modest growth, the largest economies—Germany and Italy—registered declines. Below, we break down the performance of key EU countries.

Top Performers

• Spain: Achieved a 0.7% increase, driven by robust domestic demand and significant capital investment.
• Portugal: Posted a 0.6% rise, benefiting from steady consumer spending.
• France: Recorded a modest 0.3% expansion, supported by gradual recovery in services.

Major Setbacks

• Germany: Suffered a 0.1% contraction due to persistent weak investment, especially in construction and capital goods.
• Italy: Experienced a 0.1% decline, with subdued consumption and easing industrial activity dragging output down.
• Ireland: Faced the steepest fall at 1% after a sharp drop in overall production.

Eastern European Resilience

• Romania: Expanded by 1.2%, buoyed by resilient domestic demand and inflows from the Next Generation EU programme.
• Poland: Grew by 0.8%, benefiting from both local spending resilience and European recovery funds.

Takeaway

While some eurozone members are slowly regaining momentum, key economies remain under pressure. The uneven trajectory underscores the need for tailored policy responses to sustain growth and address the specific bottlenecks each country faces.

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Industrial downturn clouds outlook

Euro Zone Industrial Production Falls in June

Industrial output in the euro area slipped by 1.3% in June, overturning the 1.1% rise seen in May and falling short of the expected 1% decline.

Breakdown of the Decline

• Capital goods production dropped 2.2%.
• Non‑durable consumer goods plunged 4.7%.

Broader European Context

• EU‑wide output fell by 1%.
• Among individual member states, Ireland recorded the steepest monthly fall at -11.3%, trailed by Portugal and Lithuania.
• In contrast, Belgium, France and Sweden posted noticeable gains in industrial production.

US outpaces Europe, but sentiment is shifting

Shift in Investor Sentiment Toward Europe Amid Economic Divergence

Despite the euro area continuing to trail the US in both output and productivity growth, Goldman Sachs reports a noticeable shift in market sentiment favoring Europe.

Key Drivers Behind the Shift

• Germany’s fiscal pivot: The country’s renewed focus on fiscal consolidation is reshaping expectations.
• Macroeconomic uncertainty in the US: Heightened volatility is diverting investors toward European markets.
• Enhanced portfolio flows: Increased capital inflows into Europe underline growing confidence.
• Currency movement: The euro has gained significant strength against the dollar, reinforcing the region’s appeal.

Goldman Sachs Forecast Adjustments

• Euro area growth forecast for 2027 has been raised by 1.2% since the beginning of the year.
• US growth projection has been lowered by 1.7% over the same period.

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Europe’s long-term challenges and opportunities

Despite the improved mood, Europe still faces deep structural challenges.
Elevated energy costs—particularly for gas and electricity—continue to erode competitiveness.
Low investment in high-growth sectors, regulatory fragmentation, and sluggish productivity gains further weigh on potential.
In addition, China, once a key export market, has increasingly become a competitor, squeezing Europe’s manufacturing base.
Yet there are reasons for optimism. Increased public investment, driven by the NGEU programme and Germany’s €500bn infrastructure plan, could support medium-term growth.
Europe also remains a global leader in pharmaceuticals and has significant untapped potential in capital markets integration, digitalisation and green infrastructure.
“Europe has opportunities to improve its economic performance through increased public investment, leadership in growth industries such as pharmaceuticals and green technologies, financial market reforms, and further integration of the internal market,” Pierdomenico said.
Efforts to deepen the single market—spurred by the European Commission’s Competitiveness Compass, informed by the Draghi and Letta reports—are seen as vital steps to unlocking future growth.
“European policymakers have a window of opportunity to build on this improved macro picture with reforms that lead to a lasting improvement in Europe’s economic performance,” Pierdomenico added.
Goldman Sachs remains constructive on Europe’s medium-term outlook, forecasting euro area growth above consensus for 2025–2028.

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