Eurozone Economy Shrinks In First Quarter Dragged By Ireland
The Eurozone’s economy shrunk by 0.2% in the first quarter of the year dragged by Ireland’s sharp contraction, the area’s statistical office informed.
It is the first time in a year the bloc’s economy shrinks and is 0.3 points lower than the 0.1% expansion from earlier flash readings. The bloc’s economy had expanded by 0.2% in the final quarter of the last year.
The overall figure, however, was largely distorted by a 12.1% quarter-on-quarter contraction and a 16.8% decline compared to the first quarter of 2025. Euro News noted that the country is used to such volatility as figures are distorted by the activity of multinational companies operating in the country, particularly the pharmaceutical sector.
Iceland stood on the other end of the spectrum, recording a 3.7% growth. Germany, the bloc’s largest economy, grew by 0.3%.
Recent figures have shown that the war in Iran is dragging Europe into a new economic squeeze, pushing prices higher just as growth weakens across the continent and raising fresh fears of stagflation.
Reuters detailed last month that the conflict is worsening Europe’s energy shock, hitting businesses, consumers, and policymakers at the same time. Europe’s private sector contracted for a second consecutive month, with S&P Global’s Composite PMI falling to 47.5, a reading that signals shrinking activity.
The pressure is coming largely from the energy sector. The war has disrupted shipping through the Strait of Hormuz, a critical route for global oil and liquefied natural gas, sending oil above $100 a barrel and raising costs for European manufacturers, transport companies, and households.
That leaves Europe facing a scenario of slower growth and elevated inflation. The European Central Bank is expected to raise interest rates in June to contain price pressures, Reuters reported, but weakening activity could make further hikes harder to justify.
The labor market is also showing cracks. Eurozone companies are cutting jobs at the fastest pace since late 2020, another sign that firms are responding to higher costs by pulling back.
The bloc’s annual inflation rate rose to 3.2% in May, marking another increase in consumer prices.
The latest flash estimate showed inter-annual inflation accelerated from 3% in April, leaving price growth well above the European Central Bank’s 2% target. Energy remained the biggest contributor to inflation, with prices rising 10.9% year over year in May, according to preliminary data released by Eurostat and reported by CNBC.
Services inflation also accelerated during the month, rising to 3.5% from 3% in April, according to the data. Meanwhile, inflation for food, alcohol and tobacco eased to 2% from 2.4% a month earlier.
