The Eurozone’s GDP grew by 0.1% in the second quarter of 2025, matching expectations. Year-on-year, growth was at 1.5%, slightly better than the expected 1.4% and equal to the previous period. Household spending rose by 0.1% in the euro area and by 0.3% in the EU, continuing past trends. Government spending increased by 0.5% in the euro area and 0.7% in the EU, recovering from earlier declines.

Economic Indicators

Gross fixed capital formation dropped by 1.8% in the euro area and 1.7% in the EU, moving away from earlier gains. Exports fell by 0.5% in the euro area and 0.2% in the EU, reversing prior growth. Imports stayed the same in the euro area but grew by 0.3% in the EU after previous increases. Markets are now looking ahead at economic forecasts rather than focusing on past quarterly data. The Eurozone’s 0.1% growth in Q2 confirms the slowdown we expected after the +0.6% growth recorded in Q1. This stagnation is largely due to a big drop in business investment and falling exports. The data indicates the economy is struggling, relying mainly on government spending. Looking forward, weak performance is supported by recent indicators. The flash manufacturing PMI for August 2025 fell to 48.5, marking its third month in downturn territory. This suggests the weakness from Q2 has likely worsened in Q3.

Central Bank Challenges

This situation poses challenges for the European Central Bank (ECB). After raising its key deposit rate to 3.0% in July 2025, the market may now expect no further rate hikes and even consider possible future cuts. We believe the ECB’s tough stance is no longer credible given the current economic climate. For equity index traders, a cautious approach with instruments like the EURO STOXX 50 is advised. Buying put options could be a good hedge against a downturn as corporate earnings forecasts are officially lowered. The significant 1.8% decline in capital formation is a strong warning sign of future weakness. This data suggests higher volatility in the coming weeks. A similar situation was seen in the 2011-2012 period when slowing growth data led to a spike in the V2X index. Traders should brace for wider trading ranges and more unpredictable markets. Overall, this environment is negative for the Euro, making short positions in EUR/USD futures or buying put options appealing. On the other hand, we expect German bund futures to perform well as investors seek safety and anticipate a softer ECB. The trend for yields seems to be downward from here. Create your live VT Markets account and start trading now.

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