ECB flags trade tariffs, competitiveness gap as risks for growth

The European Central Bank (ECB) has warned that rising trade frictions and regulatory hurdles could weigh on euro area growth, just as uncertainty over US trade policy and global demand starts to mount. 

In its latest Economic Bulletin, published on Thursday, the ECB indicated that global trade momentum weakened at the end of 2024, even as strong US imports provided temporary support. 

Trade risks rising amid US policy shifts

The ECB noted that global trade growth moderated in late 2024, with its nowcasting models estimating an average growth rate of 0.7% for the fourth quarter of 2024 and the first quarter of 2025, a slowdown from the 1.5% average in the previous two quarters. 

Nevertheless, US imports remained strong at the end of the year, providing some relief for European exporters. 

The ECB acknowledged that uncertainty over trade policies under the new US administration may have contributed to firms frontloading imports in anticipation of potential new tariffs or trade barriers.

“Greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy”, the ECB said. 

The bulletin highlighted that manufacturing new export orders declined in December 2024, signalling ongoing weakness in the manufacturing cycle and a potential slowdown in global trade growth.

“Looking ahead, while efforts to anticipate potential trade restrictions may continue to support trade at the start of the first quarter of 2025, headwinds – including new tariffs and an unwinding of the observed frontloading of imports – may later materialise”, the ECB said. 

Eurozone growth still struggling to gain momentum

Despite continued export growth, particularly to the United States, euro area economic activity remains sluggish. Gross domestic product increased by just 0.1% in the fourth quarter of 2024, with the services sector offering some support, but industrial production and business investment remain weak.

Weakening sentiment among businesses and consumers is another concern. 

“Lower confidence could prevent consumption and investment from recovering as fast as expected”, the ECB said, warning that geopolitical risks, high financing costs, and trade uncertainties could delay a stronger recovery.

Inflation slowing, but ECB remains data dependent

Inflation in the euro area has moderated but remains above the ECB’s 2% target. 

Headline inflation stood at 2.8% in January 2025, while core inflation, which excludes energy and food, was 2.9%. The ECB highlighted strong wage growth as a key driver of persistent services inflation, suggesting that underlying price pressures have not yet fully dissipated.

While inflation is easing, policymakers want clearer evidence that price stability is secured before considering further monetary policy easing.

The Governing Council reiterated that there is no pre-commitment to rate cuts and that monetary policy decisions will be made on a meeting-by-meeting basis, based on incoming economic data. 

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European competitiveness faces structural challenges

Beyond short-term trade and inflation dynamics, the ECB’s bulletin also underscored long-term competitiveness issues that could hamper the eurozone’s economic resilience. 

The report pointed to findings from Mario Draghi and Enrico Letta, who have both stressed the need for urgent structural reforms to enhance European competitiveness.

“Competitiveness has returned to the top of the European agenda”, the ECB said, noting that Europe’s firms face greater regulatory burdens and financial constraints than their US counterparts. 

The bulletin cited estimates from the International Monetary Fund, which suggest that overall trade costs within Europe are equivalent to an ad valorem tariff of 44% for manufacturing, compared to just 15% between US states.

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The ECB welcomed the European Commission’s Competitiveness Compass, calling for concrete policy action to boost investment, streamline regulations, and strengthen the Single Market. 

The bulletin highlighted that Europe’s young, high-growth firms are scaling up more slowly than in the US, partly due to financial constraints and fragmented regulatory frameworks.