Eurozone GDP disappoints, but momentum should pickup in Q1

With that said, weakness was evident elsewhere, with Germany continuing to suffer under an industrial malaise (see below), while Italy also disappointed, having stagnated now for two quarters in a row (Istat reported that this was driven by domestic demand). In contrast, Spain continued to surprise to the upside, growing well above trend again at 0.8% q/q. Spain continues to see support from EU RRF flows, as well as the boom in tourism.

Zooming out, while we do not have full details yet, it is likely that the weakness is exaggerated by the poor start to Q4 after a strong end to Q3. Indeed, as we noted in our Global Monthly, eurozone retail sales are finally seeing the pickup that had been signalled by higher mortgage lending, growing at c5% on a 3m/3m annualised basis, while construction also picked up later in Q4. In short, while the recovery remains a subdued one, we do not see cause for alarm from today’s release, and momentum is likely to pick-up again in Q1. While we have not yet seen concrete signs of it, this is also likely to be helped by an expected frontloading of exports to the US in the first half of 2025 to avoid new tariffs, with growth then expected to slow in H2 as tariffs are implemented. All told, the data today is certainly supportive of the ECB continuing to cut rates, and following today’s expected rate cut, we expect another 175bp in cuts over the coming year, taking the deposit rate to 1% by early 2026.

Germany: Heading into the election with a contraction – The German economy contracted by 0.2% q/q in the final quarter of 2024. The Q4 figure was adjusted downward from last week’s -0.1% q/q, based on very preliminary figures. While details are lacking until the end of February, Destatis points to net exports contributing negatively while domestic demand via households and government spending actually expanded during the quarter. This disparity is anticipated to persist in the upcoming quarters; domestic demand is expected to improve further as increasing purchasing power allows for additional household spending and past rate cuts feed through to the economy. Meanwhile, despite an improvement in external demand, exports are projected to remain weak due to the challenging competitive environment that is limiting the opportunities for German exporters to benefit from rising external demand.

In three weeks Germany heads to the ballot box for the federal election. The economy was already a key issue in the election campaign, and today's GDP report, which shows that the German economy has shrunk below its size at the end of 2019, is likely to further underscore that.