The U.S. economy contracted in the first three months of 2025, fueling recession fears at the start of President Donald Trump’s second term in office as he wages a potentially costly trade war.

Gross domestic product, a sum of all the goods and services produced from January through March, fell at a 0.3% annualized pace, according to a Commerce Department report Wednesday adjusted for seasonal factors and inflation.

Economists surveyed by Dow Jones had been looking for a gain of 0.4% after GDP rose by 2.4% in the fourth quarter of 2024. However, over the past day or so some Wall Street economists changed their outlook to negative growth, largely due to an unexpected rise in imports as companies and consumers sought to get ahead of the Trump tariffs implemented in early April.

Indeed, imports soared 41.3% for the quarter, driven by a 50.9% increase in goods. Imports subtract from GDP, so the contraction in growth may not be viewed as negatively given the potential for the trend to reverse in subsequent quarters. Imports took more than 5 percentage points off the headline reading.

Consumer spending slowed during the period but was still positive. Personal consumption expenditures increased 1.8% for the period, the slowest quarterly gain since Q2 of 2023 and down from a 4% gain in the prior quarter.

Moreover, private domestic investment soared during the period, rising 21.9%.

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The euro zone economy grew by a stronger-than-expected 0.4% in the first quarter, flash data from statistics agency Eurostat showed Wednesday, as global tariff tensions cast uncertainty upon the bloc’s trajectory.

Economists polled by Reuters had forecast a 0.2% expansion in the first three months of the year, following a revised 0.2% growth print in the last quarter of 2024.

Figures published earlier Wednesday showed the gross domestic product (GDP) of Germany, Europe’s largest economy, rose 0.2% over the same period. The French GDP added 0.1% across the three-month stretch.

Continuing a recent trend, southern European and smaller economies outperformed, with the Spanish and Lithuanian GDPs adding 0.6% each, while Italy’s economic output grew by 0.3%. The economy of Ireland, which tends to have volatile readings due to its high proportion of multinational companies, expanded by 3.2% in the first quarter.

Euro zone economic growth has been lackluster for much of 2023 and 2024, even as the European Central Bank has been cutting interest rates in an effort to stimulate growth and boost economic activity. The ECB’s deposit facility rate, its key rate, was taken down to 2.25% earlier this month — down from highs of 4% in mid-2023.

The ECB in March said it was expecting the euro zone economy to grow by 0.9% in 2025, slightly below its January forecast. Fresh projections are due out in June, with central bank policymakers last week suggesting to CNBC that the forecasts would prove crucial in the rate decision-making process.

On the sidelines of the International Monetary Fund World Bank Spring meetings, the policymakers and other economists and officials widely noted the U.S.’ tariff policy as a key concern when it comes to growth.

ECB President Christine Lagarde noted that, while the “disinflationary process is so much on track that we are nearing completion,” there were shocks that would “dampen” the gross domestic product.

The European Union, which includes the euro zone countries, is facing 20% blanket trade tariffs from the U.S., which has briefly reduced these measures alongside levies on other counterparties until July for negotiations. The EU has also put its own retaliatory measures on hold for now. The bloc is also subject to additional tariffs on steel, aluminum and autos.

Data released on Tuesday nevertheless showed that economic sentiment in the euro area fell in April, hitting its lowest level since December 2024.

While growth has been subdued, euro zone inflation has been nearing the ECB’s 2% target, coming in at 2.2% in March. The latest inflation data release is expected later this week.

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Germany’s economy expanded by 0.2% in the first quarter from the previous three-month period, preliminary data showed Wednesday, as U.S. tariff tensions threaten the country’s growth outlook.

The figure, released by the German federal statistics office, is adjusted for price, calendar and seasonal variations.

The gross domestic product reading was in line with estimates from economists polled by Reuters. Germany’s gross domestic had contracted by 0.2% in the fourth quarter.

The statistics office attributed the quarterly increase to the fact “that both household final consumption expenditure and capital formation were higher than in the previous quarter.”

Europe’s largest economy has long been sluggish, with its GDP flip-flopping between growth and contraction in each quarter throughout 2023 and 2024. The country has so far avoided technical recession, which is defined by two consecutive quarters of contraction.

Key sectors of the economy, such as autos, have been suffering from stronger competition from China. Other industries including housebuilding and infrastructure have also been going through trying times that have been linked to higher costs, muted investment and bureaucratic hurdles.

Separately, U.S President Donald Trump’s tariff policies have thrust uncertainty onto export reliant Germany which counts the U.S. as its most important trading partner.

As part of the European Union, Germany is facing 20% blanket tariffs on goods exported to the U.S., although these levies have been temporarily reduced to 10% to allow time for negotiations. U.S. duties on steel, aluminum and autos also affect the country.

The German government last week cut its economic outlook to predict stagnation in 2025, with outgoing economy minister Robert Habeck saying Trump’s trade policies and their impact on the country were the main factor behind the revision.

One bright spot could emerge on the horizon. Germany earlier this year made changes to its long-standing debt brake fiscal rule, enabling higher defense spending, and creating a 500 billion euro ($570 billion) fund dedicated to infrastructure and climate investments.

This move has widely been regarded as a positive shift for the German economy, although much still depends on how the changes are implemented.

While Germany’s economy has been sluggish, the local inflation rate has been closing in on the European Central Bank’s 2% target. The country’s consumer price index, harmonized for comparability across the euro zone, came in at 2.3% in March on an annual basis, down from 2.6% in February.

Preliminary inflation figures for April are due out later on Wednesday, with economists polled by Reuters estimating a 2.1% reading.

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