The Eurozone economy grew 0.4% in the second quarter of 2025, according to preliminary data released by Eurostat on July 30, marking a return to expansion after two quarters of stagnation. The reading exceeded analyst expectations of 0.2% and represents the strongest quarterly growth since the third quarter of 2022.
The bloc had recorded 0.0% growth in Q1 2025 and a 0.1% contraction in Q4 2024, as manufacturing weakness and tight monetary policy weighed on activity. The Q2 rebound signals that the Eurozone may be emerging from the prolonged soft patch that followed the energy crisis and inflation shock of 2022-2023.
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Services sector leads recovery, manufacturing lags
Eurostat’s flash estimate showed that the services sector was the primary driver of the expansion, with consumer-facing industries benefiting from rising real wages and moderating inflation. The services Purchasing Managers’ Index (PMI) for the Eurozone averaged 52.8 in Q2, above the 50 mark that separates growth from contraction.
Manufacturing, however, remained a drag. The industrial PMI averaged 47.4 during the quarter, indicating continued contraction. Germany’s industrial sector, in particular, has struggled with weak export demand from China and lingering energy cost disadvantages.
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Among the largest Eurozone economies, Germany grew 0.3% quarter-on-quarter, France expanded 0.5%, and Italy posted 0.4% growth. Spain outperformed with 0.7% growth, driven by tourism and services exports. The European Central Bank noted in its July monetary policy statement that the recovery remains “uneven across sectors and countries.”
What the GDP rebound means for ECB policy
The stronger growth data reduces the immediate pressure on the ECB to deliver further interest rate cuts. The central bank held its key deposit rate at 3.75% at its July meeting, after cutting from a record high of 4.0% in June.
ECB President Christine Lagarde emphasized at the July press conference that the bank is “data dependent” and not on a pre-set rate path. The Q2 GDP figure supports the view that the Eurozone can absorb current interest rates without tipping into recession, giving the ECB room to keep rates higher for longer if inflation proves sticky.
Services inflation remains elevated at around 4.1% year-on-year, well above the ECB’s 2% target. If growth continues to improve, the ECB may delay further cuts until it sees more convincing evidence that underlying price pressures are easing.
Risks to the outlook remain
Despite the positive Q2 data, several risks cloud the Eurozone outlook. The manufacturing sector has not yet turned the corner, and global trade tensions — particularly between the European Union and China over electric vehicle tariffs — could worsen export conditions.
Political uncertainty in France following the snap parliamentary election in June has also weighed on business confidence. The French services PMI fell to 49.6 in July, slipping into contraction territory for the first time since February.
Forward-looking indicators suggest the recovery may slow in the second half of the year. The European Commission’s Economic Sentiment Indicator edged down in July, and the ECB’s own bank lending survey showed credit demand remains weak among both businesses and households.
Investors will watch the next round of PMI data in August and the ECB’s September policy meeting for further signals on the trajectory of both growth and interest rates. The Q2 GDP figure provides breathing room, but the Eurozone is not yet out of the woods.
