Euro zone economy ends 2025 on solid footing, confirming resilience

The euro zone's largest economies grew at a modest but steady pace last quarter as consumption and investments kicked into higher gear to offset low exports and exceptional uncertainty from erratic U.S. trade policy, national data showed on Friday.

The figures signal remarkable resilience for a bloc of 350 million people that was expected to succumb to a trade war with the U.S., surging export competition from China and years of military conflict on its eastern border.

Yet each quarter last year the euro zone produced respectable - if unspectacular - growth, despite industry and exports, the previous engines of expansion, struggling to gain their footing.

SPAIN REMAINS ENGINE OF GROWTH

Spain continued to drive the bloc, expanding by 0.8% on the quarter, well above expectations for 0.6%, while Germany, the euro zone's largest economy, was also above forecasts, growing by 0.3% on the quarter, against economist bets for 0.2%.

French GDP rose 0.2%, in line with predictions, overcoming fears that political instability would impact sentiment. Italy, meanwhile, grew by 0.3%, just above forecasts, and the Netherlands expanded by 0.5%.

The national data suggest the euro zone numbers, due at 1000 GMT, will be broadly in line with economist bets for 0.2% expansion compared to the previous quarter and 1.2% growth compared to a year earlier.

2026 OFF TO A GOOD START

Other figures already suggest that the bloc started 2026 on a relatively strong footing.

A key sentiment reading out on Thursday showed an unexpected jump, driven by France and Germany, with broad-based gains among all key sectors.

Meanwhile, industry is showing signs of stabilisation, households have finally started to reduce their historically high savings rate, unemployment is holding near record lows and inflation is firmly around the European Central Bank's 2% target.

Prospects are further boosted by Germany's spending boom on infrastructure and defence, which may be slow to get off the ground but will have measurable impact on growth from the second quarter.

This will end three years of German stagnation and likely cascade down to the rest of Europe, as its industry relies on a vast supplier base spread across the bloc.

Exports are unlikely to recover fully anytime soon, however, as U.S. tariffs, increasingly tough Chinese competition and the dollar's tumble over the past year point to a permanent shift in trade patterns.

This puts the burden on the domestic economy to find new sources of growth. But economists argue that consumption has plenty of reserves as does intra-EU trade, keeping prospects relatively upbeat.

Indeed, most projections see growth for years in the 1.2%-1.5% range, or around the bloc's potential.

This puts the ECB in a remarkably tranquil position as inflation is at target, interest rates are in a neutral setting and growth is at potential, a trinity some policymakers call the nirvana of central banking.

This is why investors see steady interest rates all year, with only fresh shocks upsetting this outlook.

-Balazs Koranyi/Reuters