Eurozone Growth Firms After Strong Second Quarter

The eurozone economy expanded by 0.4% in the second quarter of 2026 from the previous three months, twice the market consensus of roughly 0.2% and a marked improvement from zero growth in the first quarter. GDP was 1% higher than a year earlier. Early third-quarter indicators have also strengthened, with the final composite purchasing managers’ index rising to 52.0 in July. Growth nevertheless remains uneven, while 2.9% inflation and persistent energy-price pressure constrain the European Central Bank’s scope to loosen monetary policy.

Eurozone GDP grows 0.4% in the second quarter

Bloomberg’s August 10 report points to a firmer near-term outlook for the eurozone following a surprisingly strong April-to-June performance. The argument is supported by both official GDP figures and the latest business surveys.

Eurostat’s preliminary flash estimate shows seasonally adjusted GDP increasing by 0.4% quarter on quarter in the 21-member euro area and by 0.5% in the European Union. Compared with the second quarter of 2025, output increased by 1% and 1.2% respectively. The latest first-quarter figures show zero growth for the eurozone and 0.1% for the EU. The second-quarter estimate remains preliminary, with the next GDP release scheduled for August 14.

The eurozone result was twice the market consensus of around 0.2%.

A 0.4% quarterly expansion is not a boom, but it represents a meaningful improvement for an economy that had been close to stagnation at the beginning of the year.

Irish revisions changed the first-quarter picture

The first-quarter data require particular care.

In June, euro-area GDP for January through March was revised to a 0.2% contraction after Ireland reported a much sharper decline than previously estimated.

Ireland initially calculated that its economy had contracted by 12.1% quarter on quarter. Its final estimate later reduced that decline to 7%. Modified domestic demand, which removes some of the multinational-related distortions in Irish national accounts and is more representative of underlying domestic activity, actually increased by 0.3%.

The revision of Irish GDP subsequently lifted eurozone first-quarter growth from minus 0.2% to zero. The ECB noted that excluding Ireland the currency-area economy had expanded by around 0.3% in the first quarter.

That distinction remains relevant in the second quarter because Ireland again made an unusually large contribution to the headline figure.

Ireland, Lithuania and Sweden lead second-quarter growth

Irish GDP rebounded by 3.9% quarter on quarter after its 7% first-quarter decline. Yet GDP was still 5.6% lower than a year earlier, illustrating the extreme volatility of the headline measure.

Lithuania recorded the second-fastest quarterly increase at 1.7%, followed by Sweden at 1.4%. Sweden was incorrectly omitted from the previous version of this article.

Finland expanded by 0.9%, Portugal by 0.8% and Spain by 0.7%. The Netherlands grew 0.4%.

Germany, France and Italy each expanded by only 0.2%, while Belgium and Austria recorded zero quarterly growth.

Spain remained the strongest of the major euro-area economies on a year-on-year basis, with GDP growth of 2.7%. Germany grew 0.9%, Italy 1% and France 0.7%.

The aggregate eurozone result therefore looks stronger than the performance of its three largest continental economies.

Spain continues to outperform Germany and France

Spain expanded by 0.7% after 0.6% growth in the first quarter, maintaining annual growth at 2.7%.

Germany slowed from 0.4% quarterly growth to 0.2%. France recovered from a 0.1% contraction but expanded only 0.2%, while Italy slowed from 0.3% to 0.2%.

This divergence matters for the durability of the recovery.

Germany remains the eurozone’s largest economy and a major industrial exporter, meaning a sustained acceleration of the wider currency bloc will be more difficult without a stronger recovery in German manufacturing, investment and household demand.

Final July PMI is stronger than the flash reading

One material correction concerns the July purchasing managers’ indices.

The earlier version used the preliminary composite PMI reading of 51.9. Final data are now available.

S&P Global reports that the final eurozone Composite PMI Output Index reached 52.0 in July, an eight-month high. The manufacturing PMI was 51.9, while the Services Business Activity Index rose to 51.7 from 49.4 in June, ending three months of contraction in services. Output and new orders grew at their fastest rates since November 2025.

A reading above 50 normally signals an expansion in business activity.

The final survey data strengthen the argument that the second-quarter GDP rebound was not solely the result of statistical volatility. Business activity continued to expand as the third quarter began.

Consumer data remain more mixed

Hard consumer data offer a more cautious signal.

Euro-area retail trade volumes declined by 0.3% in June from May, although they were 0.7% higher than a year earlier. May had recorded a 0.4% monthly increase.

The data suggest that the resilient labour market has not yet translated into uninterrupted growth in consumer spending.

Industrial producer prices also declined 0.3% month on month in June after rising 0.2% in May. They remained 4.6% higher year on year.

The combination points to some cooling in immediate cost pressure but a still-elevated price level compared with 2025.

Economic sentiment improves in July

Survey-based confidence indicators also strengthened.

The European Commission’s Economic Sentiment Indicator for the eurozone rose by 1.5 points in July to 96.9. The Employment Expectations Indicator increased by 3.5 points to 97.2.

Consumer confidence improved for a third consecutive month, rising 1.7 points to minus 15.9.

Confidence has nevertheless not recovered all of the losses recorded since February and remains below its long-run average.

The data therefore point to a gradual recovery in sentiment rather than a surge in household optimism.

Unemployment remains historically low

The labour market continues to provide support to domestic demand.

Euro-area unemployment stood at 6.3% in June, stable against the revised May reading and the level recorded a year earlier.

About 11.13 million people were unemployed, an increase of 71,000 from May. Youth unemployment declined to 14.8% from 14.9%.

Low unemployment reduces the likelihood of a sharp consumer downturn, although labour-market resilience can also sustain wage growth and keep services inflation elevated.

Eurozone inflation rises to 2.9%

Inflation remains the most important constraint on the outlook.

The flash estimate for July puts annual euro-area inflation at 2.9%, up from 2.8% in June. Consumer prices rose 0.2% month on month.

Energy inflation accelerated to 10% from 8.5%. Services prices increased by 3.3% year on year, food, alcohol and tobacco by 1.2%, and non-energy industrial goods by 0.9%.

Core inflation excluding energy, food, alcohol and tobacco rose to 2.5% from 2.4%.

Full July inflation data are scheduled for August 19.

The euro area has also changed composition: Bulgaria joined at the start of 2026, meaning current aggregates cover 21 economies.

ECB holds rates after June increase

The European Central Bank left its three key interest rates unchanged on July 23.

The deposit facility rate remains 2.25%, the main refinancing rate 2.40% and the marginal lending facility rate 2.65%.

Those levels followed a 25-basis-point increase that took effect on June 17 as policymakers responded to renewed inflation risks from the energy shock.

Stronger GDP, business activity above the 50 threshold and inflation close to 3% reduce the immediate case for monetary easing.

The next decisions will depend heavily on whether energy inflation remains elevated and whether services inflation stays above 3%.

Eurosystem still forecasts growth below 1% in 2026

The June Eurosystem projections were prepared before the unexpectedly strong second-quarter GDP release.

Their baseline assumes real GDP growth of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028.

Headline inflation is projected at 3% this year, 2.3% in 2027 and 2% in 2028.

The current-year growth forecast therefore remains subdued, although the stronger second quarter creates scope for an upward revision if activity does not weaken materially.

Persistent competitiveness problems and loss of global export market share remain structural constraints.

European Commission and IMF both see 0.9% growth

The European Commission’s Spring 2026 forecast expects euro-area GDP to expand by 0.9% this year and 1.2% in 2027. It projects inflation of 3% and 2.3%, respectively.

The International Monetary Fund also forecasts growth of 0.9% in 2026 and 1.2% next year.

Its inflation projections are 2.9% for 2026 and 2.3% for 2027. The Fund sees risks as tilted toward weaker growth and higher inflation if energy-market disruption intensifies.

The similarity between the two institutional forecasts underscores how cautious the full-year outlook remained before the strong second-quarter data.

ECB forecasters’ 0.6% estimate may now be too low

The timing of the ECB’s third-quarter Survey of Professional Forecasters is crucial.

Respondents projected GDP growth of only 0.6% in 2026, followed by 1.2% in 2027 and 1.3% in 2028.

When the survey was fielded, however, the available first-quarter figure still showed a 0.2% euro-area contraction.

The Irish revision subsequently lifted the first quarter to zero, while actual second-quarter growth of 0.4% was twice the 0.2% pace expected by survey respondents.

The ECB itself noted that part of the downgrade could mechanically unwind after the statistical revision. Forecasters expected quarterly growth to strengthen gradually toward 0.3% by the fourth quarter.

The 0.6% annual forecast is therefore particularly vulnerable to an upward revision if third-quarter activity remains positive.

A strong quarter does not yet amount to a boom

Several caveats remain.

The 0.4% headline result was partly supported by unusually volatile Irish GDP. Germany, France and Italy grew only 0.2%. Retail sales declined in June, and overall economic sentiment remains below its long-run average.

At the same time, a growing number of indicators now point in the same direction: second-quarter GDP beat forecasts, July business activity reached an eight-month high, services returned to expansion, sentiment improved and unemployment remained low.

The evidence therefore supports a case for continued moderate expansion rather than a new high-growth cycle.

As International Investment experts note, the 0.4% second-quarter result clearly improves the eurozone’s near-term outlook, but it should not be extrapolated mechanically into the second half of the year. Irish GDP remains exceptionally volatile, while Germany, France and Italy each grew by only 0.2%. The more important signal is the improvement in July business activity. If that momentum continues through August and September, full-year 2026 growth forecasts are likely to be revised higher. The principal risk is that growth and inflation are strengthening at the same time. With headline inflation close to 3% and energy prices rising at a double-digit annual rate, the ECB has less scope to support activity through lower borrowing costs. A renewed energy shock could therefore produce the least favourable combination for investors: weaker growth, persistent inflation and higher-for-longer interest rates.