Eurozone: GDP Decline Offset by Iranian Oil Shock

A Contraction Driven by Foreign Trade

In detail, domestic demand has not faltered. Household consumption contributed positively to eurozone growth, by 0.1 percentage point, as did government spending. However, these supports were insufficient to offset the other weaknesses of the quarter. Gross fixed capital formation subtracted 0.1 point from growth. Most notably, the trade balance, i.e., exports minus imports, was the main drag, with a negative contribution of 0.3 points.

This data is significant because it shows that the eurozone was penalized by its external relationships just as the global environment became more unstable. The ECB had already identified this transmission channel in its March projections. It indicated that the conflict was likely to weaken external demand directed at the eurozone, particularly through rising energy prices, uncertainty, and effects on the global economy. It also estimated that the growth of foreign demand for the eurozone would slow significantly in 2026, to 2.1%, after 4.3% in 2025.

Oil Turns The Slowdown Into A Broader Risk

Oil plays a central role here. As early as March, disrupted oil flows in the Strait of Hormuz and production interruptions related to the war in Iran had led analysts to significantly raise their crude price forecasts. The Reuters survey pointed to Brent being expected at an average of $82.85 per barrel in 2026, compared to $63.85 in the February survey conducted before the conflict began.

For the eurozone, a net energy importer, this type of shock operates through several channels. It increases transportation and production costs, weakens company margins, complicates investment decisions, and may affect household purchasing power. These effects are not always immediately reflected in national accounts, but they quickly alter expectations. This is precisely what the March PMI index indicated. The eurozone economy was already close to stagnation, and Chris Williamson, Chief Economist at S&P Global Market Intelligence, noted that the PMI was sending stagflation risk signals, with the war in the Middle East driving up prices while hindering growth. Consumer confidence in the eurozone fell to its lowest level since late 2023.

Companies Retain Employees but Reduce Work Intensity

The labor market remains, at first glance, a point of resilience. Eurostat estimates that employment increased by 0.1% in the eurozone in the first quarter, with 176.3 million people employed. Over twelve months, employment is still growing by 0.5%, although the pace has slowed compared to the previous quarter's 0.7%. However, this figure should be viewed alongside the drop in hours worked, which decreased by 0.2% over the quarter. The eurozone is not massively shedding jobs, but it is utilizing less labor.

This divergence between employment and hours worked aligns with an economy where companies are in a holding pattern: they maintain their workforce but adjust activity downward. The ECB had also described a similar mechanism in its projections. It estimated that companies would generally retain their employees in the short term in response to the temporary shock caused by the war in the Middle East, while also highlighting that the pressure on profits linked to high input costs could limit this capacity for retention.

A Highly Diverse Eurozone

The eurozone average finally hides significant national divergences. Denmark recorded the highest quarterly GDP increase, at +1.9%, ahead of Estonia and Malta, each at +1.1%. Conversely, Ireland experienced a significant decline of 12.1%, while Lithuania, Sweden, and France showed respective contractions of 0.3%, 0.2%, and 0.1%.

In terms of employment, the disparities are also pronounced. Lithuania, Malta, and Estonia recorded the highest quarterly increases, with +1.8%, +1.0%, and +0.9%. Conversely, Romania, Ireland, and Portugal saw the largest decreases, at -1.0%, -0.8%, and -0.4%. These divergences remind us that the eurozone does not react as a homogeneous block. Economies most exposed to foreign trade, industrial cycles, or energy costs can be more strongly affected than those whose domestic demand or production structure better absorbs the shock.

A First Quarter That Rewrites the Outlook for 2026

The contraction in the first quarter is not enough to conclude a lasting downturn. However, it significantly lowers the starting point for the year 2026. The eurozone is entering the coming months with already weakened activity, negative foreign trade, reduced investment, and a labor market that is holding up more due to workforce numbers rather than hours worked.
The Iranian shock reinforces this fragility. It began before the end of the quarter, immediately raising energy price assumptions and has already led the ECB to revise its 2026 growth forecasts downward. This is not just a future risk. It's a shock that occurred within the quarter, with effects spreading through costs, confidence, investment decisions, and business leaders' expectations.

The GDP decline published by Eurostat reflects a European economy that was already weak in the first quarter, while the Iranian shock, initiated at the end of February, likely worsened the late-quarter environment and darkened the outlook for the rest of the year. It's this combination that makes the publication particularly sensitive.