The eurozone economy unexpectedly contracted in the first quarter of the year, marking its first decline in 12 months and underscoring the growing economic pressures confronting Europe as inflation accelerates and the conflict involving Iran fuels a new energy shock.
Eurostat, the European Union's statistics agency, said gross domestic product across the 20-country currency bloc fell 0.2% from the previous quarter. The figure was significantly weaker than earlier estimates showing a 0.1% expansion and reversed the 0.2% growth recorded during the final quarter of last year.
The sharp downgrade was driven largely by Ireland, whose economy shrank 12.1% from the previous quarter and 16.8% from a year earlier. Economists have long cautioned that Irish economic data can be unusually volatile because of the outsized impact multinational corporations, particularly pharmaceutical and technology companies, have on the country's national accounts.
Without Ireland's steep decline, the picture across much of the eurozone was more mixed than uniformly weak. Germany, the bloc's largest economy, posted 0.3% quarterly growth, while several other countries continued to expand modestly despite rising geopolitical uncertainty and higher borrowing costs.
At the other end of the spectrum, Iceland recorded 3.7% growth during the quarter, highlighting the uneven nature of economic performance across Europe.
The weaker growth figures arrive as policymakers grapple with mounting inflation pressures linked to disruptions in global energy markets. The conflict involving Iran has complicated Europe's economic outlook by threatening shipping routes through the Strait of Hormuz, one of the world's most important transit corridors for oil and liquefied natural gas.
According to Reuters, the resulting increase in energy prices has intensified concerns that Europe could face a period of stagflation-a combination of sluggish economic growth and persistent inflation. Oil prices have climbed above $100 per barrel, increasing costs for manufacturers, transport operators and consumers across the continent.
Recent economic indicators suggest those pressures are already spreading through the broader economy. S&P Global's Composite Purchasing Managers' Index fell to 47.5, signaling a second consecutive month of contraction in private-sector activity. At the same time, companies have accelerated job reductions, with eurozone employers cutting positions at the fastest pace since late 2020.
Inflation data released by Eurostat showed consumer prices continued moving further above the European Central Bank's target.
Key figures from the latest report include:
- Annual inflation rose to 3.2% in May from 3.0% in April.
- Energy prices increased 10.9% year over year.
- Services inflation accelerated to 3.5% from 3.0%.
- Food, alcohol and tobacco inflation eased to 2.0% from 2.4%.
