Euro area firms report mixed business momentum and cost pressures

Recent contacts revealed gradually increasing business momentum and confidence across the euro area, primarily driven by robust services activity.

Consumer spending on services, particularly in tourism, healthcare, and telecommunications, continued to outpace goods, benefiting from expanding capacity and digitalisation.

Retailers, however, reported subdued spending in late 2025, with intense price competition and weak consumer confidence limiting growth outside of discount periods.

While physical investment was picking up, especially in electrification, data centres, energy, and defence, manufacturing faced significant headwinds.

High energy, labour, and regulatory costs, coupled with intensifying competition, led to euro area firms losing market shares in domestic and foreign markets.

These varying cost pressures also contributed to intra-euro area growth differentials.

The investment outlook showed gradual improvement, with machinery and equipment manufacturers reporting better order books for electrification, data centres, energy, and defence projects.

Orders also linked to anticipated public infrastructure spending in Germany.

Global trade proved resilient to US tariffs, yet euro area net trade suffered from trade diversion, marked by strong intra-Asian trade and increased imports from China.

Many manufacturers reported losing market shares to Chinese competitors, reflecting significant losses in cost competitiveness since the pandemic, exacerbated by euro appreciation.

The impact of US tariffs in 2025 was largely lower than anticipated, due to factors like frontloading and rapid global trade reorientation.