The European economy emerged from a shallow recession in the first quarter of 2024, ending a year of virtual stagnation.

Expansion in the bloc was broad-based, with all of the biggest national economies performing slightly better than expected, as falling inflation raised consumers’ spending power and a much-feared rise in unemployment failed to materialize.

Gross domestic product across the eurozone grew by 0.3 percent in the three months through March, according to Eurostat figures released Tuesday. It had contracted by 0.1 percent in the previous two quarters, and only grew by 0.1 percent the quarter before that. In year-on-year terms, output was up 0.4 percent.

“The eurozone economy finally showed some meaningful growth again,” said ING senior economist Bert Colijn, pointing to lower energy prices and a rebound in  consumers’ purchasing power as drivers of growth. 

Crucially, the bloc's largest economy, Germany, recorded a return to growth, with its GDP expanding by 0.2 percent after contracting in both of the previous two quarters. France's grew by the same amount, while Spain and Portugal both recorded an impressive 0.7 percent. Italy's economy also picked up — growing by 0.3 percent versus 0.1 percent in the fourth quarter of 2023. 

While monthly data suggest services have been largely responsible for the upturn, there have also been signs recently that industrial production, which had been battered by the surge in energy prices in 2022, has also bottomed out. German business confidence, as measured by the Ifo institute, has been rising all year. While that hasn't yet resulted in a strong turnaround, the Czech Republic and Hungary, two countries whose manufacturing sectors are deeply integrated with Germany's, both reported stronger-than-expected growth in the quarter on Tuesday.

Southern Europe shines

Southern European economies continued to perform strongly, buoyed by a robust showing in services. Analysts point to tourism, in particular, as a driver of growth. 

Miguel Cardoso, chief economist for Spain at BBVA Research, told POLITICO that that reflects a variety of issues at a time when consumers everywhere are still preferring to spend money on services and experiences rather than goods. Southern Europe has improved its competitiveness thanks to a cheaper currency and relatively low wage growth, while at the same time increasing investment in modern hotels. Geopolitical uncertainty, meanwhile has led Europeans to stay closer to home, he argued.

The improvement comes amid intense debate in Brussels and European capitals over how to revive the bloc's competitiveness and respond to an emerging subsidy race being led by China and the U.S.  Enrico Letta, the ex-Italian PM charged with writing a report on the EU's single market, recently warned that the bloc "can't wait any longer" to tackle the ingrained problems holding its economy back.

But analysts warned a strong and sustained upturn is unlikely due to various headwinds facing the economy. 

“We have not seen most of the impact of the change in the fiscal stance towards some austerity,”  AXA Investment Management chief economist Gilles Moëc warned, with a nod to continued budget tightening across the region.  

ECB won't be put off easing — at least once

Moëc added that the return to growth may slightly complicate the outlook for the European Central Bank, even though he said inflation data that was also published Tuesday showed that the slowing trend in price growth was still intact. Services inflation, which has been the ECB’s biggest bugbear in recent months, eased for the first time this year, to 3.7 percent.  

The ECB has already factored a modest recovery this year into its forecasts and its vice-president Luis De Guindos repeated late on Monday that the risks to the outlook were still skewed firmly to the downside.  

The central bank has widely telegraphed its intentions to cut its policy rate at the June meeting of its Governing Council. It still remains overwhelmingly likely to do so, HSBC senior economist Fabio Balboni wrote in a note to clients.  However, he added, “today's data increases the uncertainty on the path of rate cuts after June.”