Trade policy uncertainty slows euro area growth and investment
Trade policy uncertainty has significantly increased, reaching historical highs and weighing on euro area activity throughout 2025. This persistent uncertainty continues to pose risks, given the region's deep integration into global trade networks.
Uncertainty's triple threat to euro area
Trade policy uncertainty, which peaked in early 2025 following a series of tariff announcements, affects the euro area economy through several channels.
The most direct impact is on trade itself, as threats of tariffs and policy reversals disrupt trade flows and global supply chains, raising costs.
This is particularly relevant for the euro area due to its high openness and large share of investment goods in exports.
Beyond direct trade effects, uncertainty prompts firms to adopt a "wait-and-see" approach, leading to postponed investment, hiring activities, and cross-border commitments.
Evidence from ECB contacts with non-financial companies confirms that elevated uncertainty has been a key factor weighing on the investment outlook.
Finally, a confidence channel amplifies these effects, as reduced trade and investment weaken broader economic sentiment, particularly in the manufacturing sector.
Quantifying the economic drag and resilience
Model-based analysis suggests that elevated trade policy uncertainty weighed on euro area real gross domestic product (GDP) in 2025.
A Bayesian vector autoregression, covering 1999 to 2025, indicates that the increase in uncertainty in 2025 is associated with an average decline in real GDP growth of approximately -0.3 percentage points relative to 2024.
The estimated impact on business investment is around three times larger than on private consumption, with stronger effects on manufacturing than on business services.
Despite this drag, euro area real GDP proved more resilient than expected, growing by 1.5% compared to a 0.9% projection.
Offsetting factors included firms frontloading economic activity in anticipation of higher tariffs, supportive monetary policy conditions, and fiscal measures such as the Next Generation EU programme and increased defence spending.
A persistent headwind, not a storm
This study confirms that trade policy uncertainty is a significant, ongoing drag on the euro area economy, even if direct impacts are sometimes masked by other factors.
While the region demonstrated resilience in 2025, the underlying structural shifts and investment delays highlighted in the research suggest a deeper, long-term cost.
Policymakers must recognize this subtle but pervasive influence to foster sustained growth and stability.