Eurozone GDP Stagnation Deepens, ECB Cut Looms as Energy Costs Bite

Manufacturing, which looked poised to turn a corner at the start of the year, now faces a renewed cost squeeze. Higher input prices erode margins just as order books remain thin. The hoped-for inventory restocking cycle may stall before it ever gains traction. The combination of cautious households and cost-hit factories points to a Q2 GDP print that could easily dip back toward zero or below.

Euro and ECB Rate Path Implications

For the euro, the macro transmission is straightforward. Stagnant growth and a deteriorating outlook for the current quarter reinforce the case for the European Central Bank to deliver additional rate cuts. Markets had already priced in a move at the June meeting; the GDP data and the energy-price headwind make it harder to argue for a pause. Lower rate expectations tend to narrow the yield advantage that the euro has held against the dollar in recent weeks, and that can push EUR/USD back toward the bottom of its recent range.

The currency pair was little changed immediately after the release. The underlying flow, however, is negative. If upcoming PMI surveys confirm the sentiment damage flagged in the GDP report, the euro could lose the support it has drawn from a relatively hawkish ECB narrative. The next concrete test comes with the flash May PMI readings, which will show whether the manufacturing recovery is genuinely reversing or merely pausing.

• Eurozone Q1 GDP second estimate: +0.1% qoq, unchanged from the preliminary reading.
• Q4 2024 growth was revised lower, softening the base for 2025.
• Rising oil and gas prices are dampening economic sentiment, with household confidence and consumption activity under pressure.
• Manufacturing faces higher input costs, threatening the nascent recovery that appeared early in the year.
• The growth and energy backdrop strengthens the case for an ECB rate cut in June, a headwind for the euro.

The next scheduled policy decision from the ECB lands in early June. Before that, the flash PMIs and the next round of inflation data will either validate the downbeat signal from this GDP report or offer a reason to doubt it. For now, the transmission from energy markets to the real economy is the dominant channel, and it points to a euro that will struggle to sustain any rallies driven by short-covering alone.