GDP records sharpest contraction since Q1 2022 in Q4

GDP reading: GDP declined 0.1% on a seasonally adjusted quarter on quarter basis in the fourth quarter, contrasting the 0.4% expansion logged in the third quarter and marking the worst reading since Q1 2022. The contraction was partly payback from the end of the Olympics, which gave the economy a temporary boost in Q3. Political paralysis and fears over U.S. tariff hikes likely also weighed on momentum. On an annual basis, economic growth slowed to 0.7% in Q4, from the previous period's 1.2% expansion and marking the softest expansion since Q4 2020.

Drivers: Household spending growth eased to 0.4% seasonally-adjusted quarter-on-quarter in Q4 from a 0.6% expansion in Q3. Government spending expanded 0.4% (Q3: +0.5% s.a. qoq). Meanwhile, fixed investment shrank at a softer rate of 0.1% in Q4, following the 0.3% contraction recorded in the prior quarter. On the external front, exports of goods and services slid at a softer pace of 0.2% in Q4 (Q3: -0.8% s.a. qoq). Finally, imports of goods and services bounced back, growing 0.4% in Q4 (Q3: -0.4% s.a. qoq).

GDP outlook: Though GDP growth should return in Q1, it will be uninspiring and likely below the Euro area average, checked by the domestic political situation.

Panelist insight: ING’s Charlotte de Montpellier was downbeat on the outlook: “The uncertainty surrounding the 2025 budget and the possible fall of the Bayrou government continue to weigh on domestic demand, and this is likely to persist over the coming months. Household consumption growth is unlikely to accelerate. Despite falling inflation and rising real wages, increased fears about unemployment and uncertainty are likely to lead to a further rise in the household savings rate. Uncertainty and the low potential for long-term rate decline on the markets also mean that household and business investment is likely to remain weak in 2025.”

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