GDP growth hits two-year high in Q2

GDP growth exceeds expectations in Q2: GDP growth accelerated to 1.6% on a seasonally adjusted quarter-on-quarter basis in Q2, up from 0.7% in the first quarter, marking a two-year high and smashing market expectations of a slowdown. On an annual basis, economic growth improved to 4.8% in Q2, following the previous period's 2.3% expansion and marking the best result since Q1 2024 and also exceeding market expectations.

Inventories and investment drive the improvement: The improvement was driven by inventory accumulation and investment activity. Fixed investment bounced back, growing 2.4% in Q2, contrasting the 1.0% contraction in the prior quarter. Less positively, household spending shrank 0.7% in Q2, marking the steepest decline since Q2 2024 (Q1: -0.5% s.a. qoq). Moreover, government consumption contracted at a more pronounced rate of 4.4% in Q2 (Q1: +2.9% s.a. qoq). On the external front, exports of goods and services deteriorated, contracting 3.1% in Q2 (Q1: +3.0% s.a. qoq), hampered by heightened global trade turmoil. Conversely, imports of goods and services growth sped up to 3.4% in Q2 (Q1: +0.4% s.a. qoq).

Momentum to cool ahead: Our Consensus is for the economy to lose steam in H2. However, Q2’s upside surprise drove several panelists to upgrade their 2025 GDP growth projections, which are now seen near that of 2024. Still, economic momentum will remain soft by historical standards, tamed by elevated interest rates and inflation. Rising political instability at home and in the region is a downside risk.

Panelist insight: ING’s Muhammet Mercan commented: “This stronger-than-expected performance may prompt the central bank to adopt a more cautious approach to interest rate cuts. Given the resilience in domestic demand, we have raised our full-year GDP growth forecast for 2025 to 3.3%, up from the previous estimate of 2.7%.”

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