Euro Zone Economy Shows Unexpected Growth Amid Trade Challenges

Euro Zone Economic Performance Overview

By Balazs Koranyi

Growth Drivers: Spain and Germany

FRANKFURT, Jan 30 (Reuters) - The euro zone economy grew quicker than expected last quarter as consumption and investments kicked into higher gear, offsetting low exports and the exceptional uncertainty emanating from U.S. trade policy, Eurostat data showed on Friday.

Challenges Facing Exports

The figures signal remarkable resilience for a bloc of 350 million people that was expected to succumb to a trade war with the U.S., surging export competition from China and years of military conflict on its eastern border. 

Future Economic Prospects

Yet each quarter last year the euro zone produced respectable - if unspectacular - growth, despite industry and exports, the previous engines of expansion, struggling to gain their footing.

SPAIN REMAINS ENGINE OF GROWTH

The bloc's economy grew by 0.3% on the quarter, above expectations for 0.2% in a Reuters poll, and expanded 1.3% compared with a year earlier, versus economists' consensus bet for 1.2%.

Spain remained the driver of growth, expanding a quicker-than-forecast 0.8%, but Germany, the euro zone's largest economy, also seems to be emerging from years of struggles to grow 0.3%, above economists' estimate of 0.2%.

"The fourth quarter performance (for Germany) is admittedly modest yet still the best quarterly performance in the last three years," ING economist Carsten Brzeski said. "Increasing new orders and falling inventories bode well for at least a soft turnaround in industry."

Italy, too, beat forecasts with 0.3% growth while France, hampered by political instability, expanded as predicted by 0.2%.

Ireland, however, created a statistical drag for the bloc as its vast multinational sector, based there for tax reasons, contracted sharply. This is more a statistical effect, however, and does not indicate actual contraction in the economy.

2026 OFF TO A GOOD START

Other figures already suggest that the bloc started 2026 on a relatively strong footing. 

A key sentiment reading out on Thursday showed an unexpected jump, driven by France and Germany, with broad-based gains among all key sectors. 

Meanwhile, industry is showing signs of stabilisation, households have finally started to reduce their historically high savings rate, unemployment is holding near record lows and inflation is steady around the European Central Bank's 2% target.

Prospects are further boosted by Germany's spending boom on infrastructure and defence, which may be slow to get off the ground but will have a measurable impact on growth from the second quarter. 

This will end three years of German stagnation and likely support the rest of Europe, as its industry relies on a vast supplier base spread across the bloc. 

Exports are unlikely to recover fully anytime soon, however, as U.S. tariffs, increasingly tough Chinese competition and the dollar's tumble over the past year point to a permanent shift in trade patterns.

This puts the burden on the domestic economy to find new sources of growth. But economists say consumption has plenty of reserves as does intra-EU trade, keeping prospects relatively upbeat.

Indeed, most projections see growth for years in the 1.2%-1.5% range, or around the bloc's potential.

This puts the ECB in a very comfortable position as inflation is at target, interest rates are on a neutral setting and growth is at potential - a trinity some policymakers call the nirvana of central banking. 

This is why investors see steady interest rates all year, with only fresh shocks upsetting this outlook.

(Reporting by Balazs KoranyiEditing by Peter Graff)