European equities rallied, led by Spain, Portugal, and Italy. Bonds fell except in Italy. Euro weakened, while Brent crude rose amid easing U.S.-China trade tensions.

European bond prices declined over the week, with the notable exception of Italy, where yields continued to fall. The yield spread between French and German 10-year bonds narrowed to 68 basis points, dipping below the 70-bps threshold. Equity markets posted strong gains for a second consecutive week, led by Spain (+3.77%), Portugal (+3.55%), and Italy (+3.27%). The euro weakened slightly, slipping 0.83% against the U.S. dollar. In commodities, Brent crude oil rose 3.25% as U.S.-China trade tensions eased, though gains were tempered by expectations of increased supply from Iran and OPEC+.

Eurozone GDP rose 0.3% in Q1, led by Spain and Ireland. Industrial output surged, but Q2 outlook weak. German sentiment improved; conditions remain poor.

The Eurozone economy grew by 0.3% in Q1 2025, led by Spain (0.6%) and a sharp 3.2% surge in Ireland, driven by multinational activity. Growth was supported by front-loaded exports ahead of expected US tariffs. Germany avoided a technical recession with 0.2% growth, thanks to household spending and modest investment, but its outlook remains weak due to structural challenges. Industrial production was a key driver, jumping 4.7% in Q1—the strongest gain since 2020—boosted by pharmaceutical output (+23.2%) and US-driven demand. Ireland led production growth, while sectors like automotive and machinery also performed well. However, this strength is seen as temporary amid falling external demand and trade uncertainty. German investor sentiment improved markedly in May, with the ZEW index rising to 25.2 amid progress on tariffs, new government formation, and improved financing conditions. Despite this optimism, current conditions remain poor. Overall, declining confidence and cautious investment suggest slowing momentum in Q2 2025.

Eurozone GDP grew 0.3% in Q1 2025, led by Spain and Ireland, but Q2 outlook weak due to falling confidence, softer consumption, and low investment.

Eurozone GDP grew by 0.3% (revised down from 0.4%) in the first quarter of 2025, driven primarily by stronger net exports, likely boosted by front-loaded shipments ahead of anticipated US tariffs. Among the major economies, Spain led with a solid 0.6% increase, followed by Italy at 0.3%. France and the Netherlands recorded more modest growth, both at 0.1%. Germany narrowly avoided a technical recession by rebounding 0.2% after contracting 0.2% in Q4 2024, supported mainly by household consumption and a slight recovery in investment. However, Germany’s broader economic outlook remains fragile due to ongoing structural challenges, industrial stagnation, and external headwinds, with growth for 2025 forecast to remain very low. Ireland stood out with a sharp 3.2% surge, largely driven by multinational corporations, contributing significantly to overall Eurozone growth. Despite these positive results, the outlook for the second quarter is less optimistic. Business and consumer confidence have declined, consumption growth is softening, investment remains cautious amid persistent uncertainty, and earlier export gains are likely to reverse. These factors suggest the Eurozone’s economic momentum will slow in the coming months, pointing to a more challenging environment ahead.

We expect lower growth ahead for the Eurozone as declining confidence, softer consumption, cautious investment, and reversing export gains weigh on the economy.

Eurozone manufacturing surged in Q1 2025, driven by US frontloading and pharma output, but underlying weaknesses suggest the momentum is unlikely to be sustained.

Eurozone manufacturing posted a remarkable start to 2025, with industrial production growing by 2.6% in March and an impressive 4.7% in the first quarter—the highest quarterly gain on record outside of the post-lockdown rebound in 2020. This surge significantly contributed to the Eurozone’s solid 0.4% GDP growth in Q1 and appears closely linked to US frontloading of European products ahead of incoming tariffs under the Trump administration. Notably, pharmaceutical production soared by 23.2% between January and March, with Ireland—an industry hub—leading the surge. Additional strength came from the automotive, machinery, equipment, and furniture sectors. In March alone, output rose for capital goods (+3.2%), durable consumer goods (+3.1%), non-durable consumer goods (+2.3%), and intermediate goods (+0.6%), while energy output declined slightly (-0.5%). Among member states, Ireland led monthly gains with a 14.6% increase, followed by Malta (+4.4%) and Finland (+3.5%), while Luxembourg (-6.3%), Greece (-4.6%), and Portugal (-4.0%) saw declines. Although this performance marks a temporary upswing for Eurozone industry, underlying fragilities persist, and with weakening external demand, economic uncertainty, and trade barriers ahead, the first-quarter strength is unlikely to be sustained. A more moderate and uneven recovery may emerge later in the year as global conditions stabilise and inventories normalise.

We expect that the strong Q1 performance in Eurozone manufacturing will fade, as underlying weaknesses and external uncertainties weigh on demand and production momentum.

Germany’s investor sentiment rebounded in May amid tariff progress and policy shifts, though current conditions remain weak. Optimism grows despite ongoing stagnation and structural challenges.

Investor confidence in Germany is showing a notable rebound, as reflected in the sharp rise of the ZEW Economic Sentiment Index to 25.2 in May—a 39.2-point increase that exceeded analyst expectations and reversed April’s decline. This upswing appears to be driven by several converging factors: progress in resolving tariff disputes, the formation of a new government, and more favourable financing conditions. Optimism is particularly strong in the banking, automotive, and pharmaceutical sectors, where profit expectations have surged, likely in response to improved export prospects. While sentiment has improved markedly, the assessment of current economic conditions remains bleak, with the corresponding indicator slipping slightly by 0.8 points to minus 82.0—the lowest among all countries surveyed, including the Eurozone. Despite continued structural headwinds and an economy still expected to stagnate this year, there is growing hope for gradual improvement, supported by the new administration’s planned fiscal stimulus.

We expect Germany’s economy to stagnate this year, but investor sentiment is improving amid tariff progress, policy shifts, and hopes for fiscal stimulus.