Ireland skews eurozone growth data
Lead — The recent commentary highlights how Ireland's peculiar GDP accounting has significantly impacted eurozone growth figures, reflecting a contraction of 12.1% in Irish growth and dragging the eurozone into negative territory. Per the full note source, this adjustment notably cut 0.5 percentage points from overall eurozone growth. With inflation on the rise and anticipated ECB rate hikes, the desk expects a continued deceleration in economic activity across the region despite Ireland's contribution becoming less of a drag in the upcoming quarters.
What the desk is arguing
The desk positions that Ireland's GDP accounting quirks have skewed eurozone growth metrics, indicating a faltering underlying economic momentum. Specifically, the negative revision of 0.2% in eurozone GDP for Q1 2026, driven mainly by Ireland's decline, raises concerns about the overall health of the eurozone economy as it grapples with rising inflation and the possibility of ECB tightening.
To support this view, the desk cites the Composite PMI's drop to 48.5, indicating recessionary conditions, alongside the expectation of two ECB rate hikes by year-end despite inflation nearing the 4% mark. A solid reliance on multinational presence in Ireland, especially in the pharmaceuticals sector, continues to distort the true economic picture.
While eurozone growth excluding Ireland holds positive, the desk is wary of potential stagnation as consumer sentiment remains subdued. Should these trends persist, they could affect monetary policy outlook and market positioning significantly.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with the range spanning from 1.04 to 1.12. Notably, jpmorgan anticipates a target of 1.10 by March 2026, aligning with our desk's outlook, while bofa predicts a more conservative target of 1.04 for the same tenor.
This perspective closely mirrors jpmorgan's position, indicating a bullish undertone from the desk in contrast to bofa's more bearish stance. Given these diverging targets, the desk's call aligns towards the higher end of the consensus spread, advocating for resilience in the euro relative to current pressures.
How other firms see it
Several firms are aligned with this cautious view, including jpmorgan and deutsche, both indicating bearish sentiments towards eurozone growth prospects. Meanwhile, bofa and credit suisse express contrary views, projecting a stronger euro as they anticipate a willful recovery supported by potential ECB actions.
Moreover, the EUR/USD trajectory will mirror the upcoming ECB rate decisions and inflation indicators, following the patterns established in recent months. Traders should keep a close eye on PMI readings as they will be critical in shaping sentiment in this regard.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Ireland's GDP accounting is skewing eurozone growth metrics, greatly influencing overall figures.
- 02A contraction of 12.1% in Irish growth has detrimentally affected eurozone GDP readings.
- 03Rising inflation towards 4% is prompting expectations of two ECB rate hikes before year-end.
- 04Composite PMI dropping to 48.5 suggests recessionary conditions and potential stagnation in the eurozone.
Market implications
Watch for EUR/USD to hold around the 1.075 level, as further PMI data will be pivotal in shaping market sentiment towards eurozone growth and ECB rate policy. Additionally, any shifts in inflation data could prompt recalibrations in positioning leading into Q2.
Risks to this view
The desk's view could be invalidated if inflation unexpectedly cools or if growth metrics surpass current forecasts, altering the ECB's tightening trajectory. Other catalysts may include shifts in geopolitical situations affecting energy prices or the broader economic outlook.
Articles Ireland skews eurozone growth data 10:45 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Although quirks in Irish GDP accounting drove the eurozone’s negative growth reading in the first quarter, the underlying pace of activity is clearly losing momentum. Inflation is still moving up towards the 4% mark. As a result, the European Central Bank is now likely to deliver two rate hikes this year Peter Vanden Houte Ireland hosts a large multinational sector, creating major distortions in export data The Irish statistical quagmire Eurozone GDP growth for the first quarter of 2026 was revised down from +0.1% to -0.2%.
The revision was mainly driven by a new estimate for Irish growth, showing a contraction of 12.1%, which alone cut 0.5 percentage points from eurozone growth in the first three months of the year. Ireland hosts a large multinational sector, with foreign firms often locating their intellectual property rights there. This creates major distortions in export data.
In addition, the pharmaceutical sector saw an exceptional export surge ahead of higher US tariffs, which is now gradually reversing. Even so, after four consecutive quarters of contraction, Irish GDP is likely to become less of a drag in the coming quarters. But that offers little comfort: even though eurozone growth excluding Ireland remained in positive territory, the second quarter is still likely to bring a slowdown.
Stagnation ahead The composite PMI dropped to 48.5 in May, the lowest level in 18 months and below the boom-or-bust threshold of 50. Although the European Commission’s sentiment indicator edged up slightly last month, it remained well below the levels seen in the first quarter. With uncertainty still elevated and energy prices unlikely to decline any time soon, the second and third quarters are likely to see an economy that is close to stagnation.
Beyond that, the likely end of the war, somewhat lower energy prices and a stronger impact from German fiscal stimulus should support a gradual improvement in growth. Given the much weaker first quarter and the ongoing crisis in the Middle East, we have revised our GDP growth forecast for 2026 down to 0.3%, and for 2027 to 1.2%. Fears of higher unemployment Source: LSEG Datastream "> Source: LSEG Datastream Don't expect a 2022-23 inflation revival Headline inflation rose to 3.2% in May, while core inflation reached 2.5%.
Upward pressure from energy prices is still likely to push headline inflation higher in the months ahead. And although we do expect some second-round effects, we do not think core inflation will move beyond the 3% threshold. Compared with 2022, European consumers now report much higher unemployment expectations, while fiscal support aimed at softening the energy shock is more limited.
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