Euro area economic output edged up by a mere 0.1% in the first quarter of the year, according to a preliminary Eurostat flash estimate released on Thursday. The reading covers the 21-country currency area and provides the first data on activity since the outbreak of the Iran conflict.
The 0.1% quarter-on-quarter increase for the three months to March fell short of the 0.2% pace seen in the previous quarter and missed economists' consensus, which had also targeted 0.2% growth. The subdued print arrives against a backdrop of heightened concern over energy supply routes: the euro zone, as a net importer of energy, is viewed as particularly exposed to disruptions in shipments of oil, gas and related commodities through the Strait of Hormuz, disruptions that began in late February.
A sequence of business surveys published this week paints a softer picture of activity beyond the headline GDP number. Respondents reported weakening business sentiment and a deterioration in services activity. Companies also signalled falling profits, while exporters continue to face pressure from tariffs. Separately, banks canvassed in surveys indicated that credit conditions have tightened.
Those developments complicate the European Central Bank's policy calculus amid an emerging, energy-driven upward pressure on inflation. Market participants expect the ECB to leave interest rates unchanged at its meeting on Thursday. At the same time, futures and pricing across markets imply three to four rate increases could occur over the coming year.
Taken together, the flash reading and the attendant survey evidence suggest a fragile growth environment for the euro area as it confronts the twin challenges of weakening domestic demand indicators and potential energy shocks that could feed through to prices.
Summary
The euro zone recorded only marginal growth of 0.1% in Q1 (quarter-on-quarter) in a flash Eurostat estimate covering 21 countries. This outcome undershot both forecasters' expectations and the prior quarter's 0.2% pace. Recent surveys point to weaker business sentiment, declining services activity, falling corporate profits, export weakness from tariffs, and tighter bank credit. The region's dependence on energy imports increases vulnerability to disruptions through the Strait of Hormuz, which began in late February. The ECB is broadly expected to hold rates steady on Thursday, but markets price multiple hikes over the next year.