Euro Zone Growth Exceeds Expectations: ETFs in Focus

Economic growth in the Eurozone outperformed expectations in the last quarter, despite global trade uncertainties. This resilience may lessen the need for additional interest rate cuts by the European Central Bank (ECB).

Data from Eurostat released on Wednesday showed that GDP in the 20 countries using the euro rose by 0.1% quarter on quarter. This modest growth beat forecasts, which had predicted no change. Strong performances from Spain, France and Ireland helped offset economic contractions in Germany and Italy.

Note that iShares MSCI Spain ETF EWP added 1.9% past month, iShares MSCI Ireland ETF EIRL lost 0.5% past month and iShares MSCI France ETF EWQ lost 0.2%.

Annual Growth Remains Solid

Compared to the same quarter last year, the Eurozone economy expanded by 1.4%, outpacing analysts’ expectations of 1.2%. Although this marks a slowdown from the 0.6% growth in the first quarter, that earlier figure was distorted by U.S. companies accelerating imports ahead of impending tariffs.

The first two quarters of the year point to a steady underlying momentum, supported by a recent uptick in business activity, as reflected in better-than-expected Purchasing Managers’ Index (PMI) data. These gains were driven by a robust services sector and a continued manufacturing recovery.

Trade Agreements Help Reduce Uncertainty

The recent trade agreement between the United States and the European Union has also contributed to a more stable economic outlook. Similar agreements with other key global partners, such as Japan and the UK, are further helping to ease market concerns. However, these deals include higher tariffs that could cut Eurozone growth by an estimated 0.2 to 0.4 percentage points annually.

Implications for ECB Policy

The Eurozone’s economic resilience will influence the ECB policy. After lowering its key interest rate to 2% over the past 13 months, the ECB is now seen as nearing the end of its easing cycle.

Currently, markets assign only a 50% probability to another rate cut by December. There’s also a modest expectation that rates could begin to rise by the end of 2026, assuming economic growth picks up and inflationary pressures return, as quoted on Reuters.

Risks and Uncertainty Persist

Despite these encouraging signs, significant uncertainties remain. The EU has yet to finalize the details of its trade deal with the United States, and it could prolong new investment decisions of businesses.

Meanwhile, the absence of a U.S.-China trade agreement has raised concerns that China might offload excess goods onto global markets. Such dumping could push prices lower worldwide, reigniting fears of subdued Eurozone inflation.

If inflation drops significantly below target, the ECB may be compelled to cut interest rates again.

ETF Impact

Against this backdrop, investors should track Euro zone ETFs closely. iShares MSCI Eurozone ETF EZU lost 0.6% past month. Vanguard European Stock Index Fund ETF VGK has retreated 0.8% past month. iShares Currency Hedged MSCI Eurozone ETF HEZU lost 0.2% whileSPDR S&P 500 ETF Trust SPY added 3% during the same time frame.

HEZU held up better than EZU, helped by currency hedging. UUP jumped (up over 3.5% past month) far more than FXE (down 3% during the same time frame), highlighting dollar strength versus the Euro. With the latest U.S. GDP data coming in strong too, this trend is likely to continue.

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This article originally published on Zacks Investment Research (zacks.com).

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