The European Central Bank published analysis in its Economic Bulletin examining the reversal in sectoral momentum in early 2025, with manufacturing returning to growth after two years of contraction while services activity in the business economy lost pace. The box attributes the manufacturing rebound largely to temporary “frontloading” of US demand ahead of higher tariffs, while linking the services slowdown to a surge in trade policy uncertainty after the United States’ tariff announcement on 2 April. Production data show manufacturing rebounded in the first quarter of 2025 as the contraction in the euro area excluding Ireland abruptly halted and expansion in Ireland accelerated, while services weakened after expanding through 2023 and 2024. Manufacturing output rose sharply in March before falling between April and June, a pattern that was stronger in sectors with higher exposure to exports to the United States; pharmaceuticals illustrate this most clearly, rising by nearly 9% in March versus February before declining by a similar amount on average in the second quarter, with high volatility in Germany and the Netherlands and indications of a similar profile in Ireland. The analysis also notes that trade policy uncertainty reached a historic high after the 2 April announcement and, consistent with prior evidence, appears to have weighed more on investment-related activity, with survey data suggesting a larger drag on manufacturing and business services than on consumer services, although manufacturing has so far been supported by frontloading. For the near-term outlook, European Commission survey data for the third quarter to date point to some further softening in consumer services and a slight recovery in business services as uncertainty has abated, alongside manufacturing activity rising further above its level at the start of the year. The ECB flags that persistently elevated trade policy uncertainty could continue to dampen services and become more visible in manufacturing as frontloading unwinds, while an EU-US trade agreement could reduce uncertainty; it also highlights euro appreciation and higher tariffs as headwinds, partly offset by delayed effects from monetary policy loosening and potential support from higher defence and infrastructure spending.
European Central Bank 2025-09-25
European Central Bank analysis links early 2025 manufacturing rebound to US tariff frontloading and services slowdown to trade policy uncertainty
The European Central Bank's Economic Bulletin notes a sectoral shift in early 2025, with manufacturing rebounding due to temporary US demand, while services slowed amid US tariff-related trade uncertainty. Manufacturing rose sharply in March, especially in export-exposed sectors like pharmaceuticals, before declining in the second quarter. Ongoing trade policy uncertainty and euro appreciation could dampen both sectors, though potential EU-US trade agreements and increased spending may offer support.