Europe: Divergent Economic Growth
2025-09-10
■ The Eurozone has seen six consecutive quarters of economic growth, but growth rates differ among member countries.
■ Spain maintains rapid growth, driven by factors such as immigration, while Germany faces strong headwinds in its manufacturing sector and remains in a slump.
The revised second-quarter Eurozone GDP figures released on September 5th showed real GDP growth of 0.1% quarter-on-quarter, consistent with the second flash estimate and a notable slowdown from the first quarter's 0.6%. Analyzing demand components in the revised figures, household final consumption expenditure (0.1%), government final consumption expenditure (0.1%), and inventory changes (0.5%) all contributed positively, while gross fixed capital formation (-0.4%) and net exports (exports minus imports, -0.2%) contributed negatively. Despite six straight quarters of growth, excluding inventory changes, growth remains negative. Household consumption slowed for three months in a row, and fixed capital formation and exports— which surged in the first quarter—have since declined. Growth among member states also varies; in the second quarter, Germany and Italy saw negative growth. While France, after three quarters, outperformed the Eurozone overall, its underlying growth has slowed since Russia invaded Ukraine. Meanwhile, Spain has consistently posted growth rates above the Eurozone since the start of the COVID-19 pandemic.
Three key factors support Spain's ongoing economic strength: service exports focusing on leisure and accommodation, green investments backed by public subsidies, and economic expansion fueled by immigrant inflows. As activity normalizes post-pandemic, rising tourism demand has spurred growth in service exports. At the policy level, the European Recovery Fund was created to support post-pandemic recovery and promote green investments, with significant funds allocated to southern European countries, which experienced sharp declines during the pandemic. This also applies to Italy, but Spain has been more proactive in welcoming immigrants, addressing labor needs in sectors like tourism, and creating new consumer demand through migration. Although pandemic rebound spending has mostly tapered off and the European Recovery Fund's contribution is expected to decline, the influence of immigration is likely to persist.
In contrast, the manufacturing sector has faced increasingly severe headwinds since the pandemic, becoming a major drag on economic activity in countries like Germany and Italy. Several supply-side pressures—including the energy crisis triggered by Russia's invasion of Ukraine, rising labor costs, and tighter financial conditions (higher interest rates)—have driven up manufacturing costs. On the demand side, export growth to China has been sluggish due to policy shifts and increased competition from Chinese companies, especially in key exports like automobiles. US tariffs have added further constraints, forcing adjustments to the traditional growth model reliant on cheap Russian energy for production. The EU is strengthening its security by increasing defense and infrastructure investments and shifting toward growth driven by domestic demand. However, energy-intensive industries such as chemicals and steel, which are stuck in a structural recession, will face challenges in recovering from the downturn.
■ Spain maintains rapid growth, driven by factors such as immigration, while Germany faces strong headwinds in its manufacturing sector and remains in a slump.
The revised second-quarter Eurozone GDP figures released on September 5th showed real GDP growth of 0.1% quarter-on-quarter, consistent with the second flash estimate and a notable slowdown from the first quarter's 0.6%. Analyzing demand components in the revised figures, household final consumption expenditure (0.1%), government final consumption expenditure (0.1%), and inventory changes (0.5%) all contributed positively, while gross fixed capital formation (-0.4%) and net exports (exports minus imports, -0.2%) contributed negatively. Despite six straight quarters of growth, excluding inventory changes, growth remains negative. Household consumption slowed for three months in a row, and fixed capital formation and exports— which surged in the first quarter—have since declined. Growth among member states also varies; in the second quarter, Germany and Italy saw negative growth. While France, after three quarters, outperformed the Eurozone overall, its underlying growth has slowed since Russia invaded Ukraine. Meanwhile, Spain has consistently posted growth rates above the Eurozone since the start of the COVID-19 pandemic.
Three key factors support Spain's ongoing economic strength: service exports focusing on leisure and accommodation, green investments backed by public subsidies, and economic expansion fueled by immigrant inflows. As activity normalizes post-pandemic, rising tourism demand has spurred growth in service exports. At the policy level, the European Recovery Fund was created to support post-pandemic recovery and promote green investments, with significant funds allocated to southern European countries, which experienced sharp declines during the pandemic. This also applies to Italy, but Spain has been more proactive in welcoming immigrants, addressing labor needs in sectors like tourism, and creating new consumer demand through migration. Although pandemic rebound spending has mostly tapered off and the European Recovery Fund's contribution is expected to decline, the influence of immigration is likely to persist.
In contrast, the manufacturing sector has faced increasingly severe headwinds since the pandemic, becoming a major drag on economic activity in countries like Germany and Italy. Several supply-side pressures—including the energy crisis triggered by Russia's invasion of Ukraine, rising labor costs, and tighter financial conditions (higher interest rates)—have driven up manufacturing costs. On the demand side, export growth to China has been sluggish due to policy shifts and increased competition from Chinese companies, especially in key exports like automobiles. US tariffs have added further constraints, forcing adjustments to the traditional growth model reliant on cheap Russian energy for production. The EU is strengthening its security by increasing defense and infrastructure investments and shifting toward growth driven by domestic demand. However, energy-intensive industries such as chemicals and steel, which are stuck in a structural recession, will face challenges in recovering from the downturn.