Global and European setting Monthly Report – August 2025
Published on 21/08/2025
Global and European setting Monthly Report – August 2025
1 Global economy robust so far despite trade disputes
The global economy remained robust in the second quarter of 2025. US gross domestic product (GDP) rose significantly in the second quarter after having fallen slightly at the start of the year. The Chinese economy recorded similar growth to the first quarter despite the higher tariffs imposed by the United States. GDP in the euro area increased again slightly in the second quarter following the strong start to the year. The global economy appears so far to have been able to withstand the tougher and in part erratic US trade policy. This resilience was supported by the short-term front-loading and diversion of trade flows.
Looking ahead. however, the erratic and protectionist trade policy of the United States is likely to weigh more heavily on the global economy. The average tariff imposed by the United States on all trading partners has risen by more than 14 percentage points since the start of the year. It has thus reached the highest level since the 1930s despite the US administration coming to an agreement with some trading partners on more moderate tariff rates than those originally threatened (see also the supplementary information entitled “Realignment of US trade relations”). However, a final agreement with China, the key trading partner of the United States, is still pending. Given the in part erratic US tariff policy, the risk of an escalation of the trade disputes persists. This and the tariff hikes already adopted are set to increasingly weigh on global trade. Taken together, the trade policy concessions of some partner countries of the United States are too insignificant to offset the negative effects of the additional US tariffs on global trade. The latter fell sharply already in April and May following a substantial increase beforehand in particular of US imports in anticipation of the tariff hikes. In addition to the unwinding of these front-loading effects, the initial dampening impact of the increased tariffs on demand from the United States became apparent. Growth in global industrial output also lost momentum. Moreover, the results of recent surveys point to a further slowdown of global industrial activity in the summer. The medium-term outlook for global trade will depend on whether further countries give in to the temptations of protectionism and likewise seal themselves off more.
Supplementary information
Realignment of US trade relations
The US government is resolutely pursuing a protectionist trade policy. At the beginning of April, it announced drastic country-specific tariff increases of between 11 and 50 percentage points on most imported goods. A few days later, it paused these “reciprocal tariffs” for 90 days, reducing them to a baseline tariff increase of 10 percentage points. 1 With the threat of reintroduction of the “reciprocal tariffs” looming in the background, many countries have renegotiated their trade relations with the United States. 2
The negotiation results that have emerged so far paint the significantly altered outlines of a new global trade order. On the part of the United States, this is limited to raising import duties, while not only are countermeasures largely absent, but considerable concessions have been made in some cases. The agreements entered into with many important partners foresee considerable increases in bilateral US import tariffs compared to the levels at the beginning of the year, although they represent a retreat from the maximum tariffs threatened in the interim. The new country-specific US import tariffs range mostly between 10 % and 20 %. At the same time, the negotiating partners are allowing easier market access for some US products. In addition, many of the agreements include clauses implicitly aimed against China, for example to prevent goods from being rerouted to the United States via third countries or to secure supply chains. The United States has imposed additional tariffs of between 10 % and 50 % on trading partners with which no new trade agreement has been reached. In total, the United States’ estimated effective import tariff rate has risen by 14 percentage points to around 16 % since the beginning of the year – the highest level since the 1930s. The US administration is also planning to impose further product-specific tariffs, including on pharmaceuticals, semiconductors and wood products.
The trade agreement between the United States and the EU is likewise asymmetrical. The average US tariff on imports from the EU is expected to rise from 1.5 % before Trump took office to around 14 %. The EU has opted not to take retaliatory measures, presumably also aimed at preventing an escalation of the trade dispute and additional damage. It also agreed to remove most tariffs on industrial goods from the United States and to lower trade barriers for some agricultural goods. 3 The European Commission hailed the announced reduction in US tariffs on European cars and motor vehicle parts – to 15 %, after it had been raised by 25 percentage points – as a success. This is expected to provide relief for the European automotive industry. Pharmaceuticals and semiconductors from the EU should in the future be subject to a 15 % tariff, and – for the time being – the EU should escape the additional US sectoral tariffs. Individual products of particular importance to the United States, such as aircraft and aircraft parts, certain chemical products and generics or critical raw materials, have been exempted from these tariff increases. The prospect of a reduction in non-tariff barriers to trade, for which details have yet to be specified, could simplify transatlantic trade in some goods. Small pockets of trade facilitation cannot, however, detract from the fact that European goods exports to the United States have become distinctly more difficult, while US exports to the EU have been made easier.
Despite the strong asymmetry of the trade agreement, the burdens on the EU’s economy are not expected to be excessive overall. Last year, exports to the United States accounted for around 3 % of the EU’s GDP. A significant portion was attributable to pharmaceuticals and high-value industrial goods, demand for which is not very price-sensitive in the short term. This favours the argument that much of the tariff burden is expected to be borne by customers in the United States. Many European companies will nevertheless suffer from the consequences of the US tariffs. Among EU Member States, Ireland is particularly exposed because it exports large volumes to the United States. Within the EU, Germany’s export-oriented economy is also affected by the US tariffs to an above-average extent. Model calculations using the NiGEM economic model suggest that they could reduce the EU’s economic output by around 0.1 % next year. 4
Despite the agreements between the United States and its trading partners, the risk of renewed escalation of the trade disputes persists. The trade settlements are not legally binding treaties. Instead, they amount to framework agreements in which key points have been specified. This means that negotiations on the details will continue. The possibility cannot be ruled out that trade tensions between the United States and some trading partners will flare up again in the course of the negotiations. Sectoral tariffs, for example on pharmaceuticals and semiconductors, that the US administration has repeatedly threatened, have particularly high potential to cause disputes. In this new world, in which the United States aims to operate exclusively through bilateral negotiations, turning its back on the multilateral rule-based trade order, trade policy uncertainty is expected to remain high. 5
The energy markets were shaped by geopolitical factors in the period under review. Crude oil prices rose sharply at times as the military conflict between Israel and Iran escalated. This was mainly due to concerns about supply shortfalls. Prices fell again during the subsequent de-escalation. However, they were also propped up by robust demand and new sanctions and threats of sanctions for the Russian oil industry from the EU and the United States. By contrast, the production increases of some OPEC countries and their partners had a negative impact on prices. According to estimates of the International Energy Agency, the global oil markets would have been amply supplied in 2025 and 2026 even without these measures. 1 As this report went to press, a barrel of Brent crude oil cost US$68, slightly more than in May. There was a slight decline recently in European gas prices, which were noticeably lower than a year earlier, at €31 per megawatt hour.
The global disinflation process is intact in many countries, but not so in the United States. Consumer prices in the advanced economies altogether rose by 2.6 % year on year in July, which was somewhat more than in April. Core inflation (excluding energy and food) was also somewhat up recently. This primarily reflects developments in the United States where the strong inflation in services did not ease further, and goods inflation increased. The tariff hikes have so far made only a minor contribution to this, however. The clearly visible tariff-related price rises at the upstream stages of production are set only to be gradually passed on to US consumers over the next few months. In most other advanced economies, meanwhile, the disinflation process appears to be intact.
The International Monetary Fund (IMF) marginally raised its forecasts in the July WEO Update. 2 The IMF staff now expect global growth of 3.0 % for 2025, 0.2 percentage point more than in the economic outlook of April 2025. They have also slightly raised their growth forecast for 2026 to 3.1 %. These upward revisions reflect a slight upturn in the underlying cyclical trend, above-expectation front-loading effects in global trade in the first half of 2025, somewhat lower tariff assumptions 3 and the more accommodating US fiscal policy than expected. The IMF staff left their inflation outlook practically unchanged, according to which the inflation rate in the group of advanced economies should fall further to 2 % by the end of 2026. Consumer price inflation is expected to increase fairly strongly again in 2026 only in the United States. The IMF is continuing to warn of downside risks to the global economy due to higher tariffs, increased uncertainty and geopolitical tensions.
1.1 Chinese economy so far withstanding US tariffs
In China, economic growth remained robust in the second quarter of 2025. According to official estimates, real GDP rose by 5.2 % year on year, which was almost as much as in the first quarter. The economy appears so far to have withstood the burdens created by the new US tariffs. Exceptionally high additional tariffs were in force in trade between the United States and China between mid-April and mid-May before both countries reduced them again significantly. 4 Chinese goods exports to the United States nevertheless fell considerably in the second quarter. However, these losses were more than offset by additional exports to other regions. Private consumption likewise remained on a growth path in the past few months, largely due to expansive government-backed purchase incentives. However, the underlying trend remained rather subdued.
The weak price trends continued, and fears remain of export diversions to the EU.Consumer prices in July were unchanged compared with the level recorded a year before. Excluding food and energy, they likewise only rose moderately by 0.8 %. The Chinese government recently announced its intention to step up its measures against overcapacities and what it sees as excessive price competition in some sectors. The measures are primarily addressed at the supply side and less at the demand side. Owing to the sharp fall in exports to the United States, the EU is not the only place concerned that cheap imports from China could flood the markets. Chinese goods exports to the EU rose fairly sharply in US dollar terms after seasonal adjustment in the second quarter of 2025 compared with the previous quarter. However, it is currently still not clear to what extent this was due to diversion effects. 5 The conditions of the trade agreement with the United States which is still pending will play a crucial role in the further outlook for the Chinese export industry.
1.2 Diverging trends in other major emerging market economies
The economy in India is likely to have remained buoyant. The last available official GDP data, which relate to the first quarter of 2025, revealed that economic output was up 7.4 % in a year-on-year comparison. A continued buoyant expansion is on the cards for the second quarter. In view of what is likely to be an above-average summer monsoon, the harvest prospects and therefore the outlook for the agricultural sector are also altogether very favourable. Food prices have already fallen significantly in the past few months. Against this backdrop, consumer price inflation, which stood at 1.6 % in July, fell to its lowest level since mid-2017. Following a cut of 50 basis points in June, the Reserve Bank of India left the key interest rate unchanged in August at 5.5 %. The United States announced punitive tariffs on imports from India in August in order to put pressure on the government to discontinue crude oil imports from Russia. Together with the existing additional tariffs imposed by the United States, Indian exports to the United States would thus be subject to a high tariff rate of 50 % in the future. For an Indian economy which has dedicated more of its efforts in recent years to producing and exporting goods, this could inflict considerable damage over the medium term.
The upturn in Brazil continued at a moderate rate. Real GDP after seasonal adjustment rose sharply on the previous quarter in the first quarter of 2025 due to exceptionally high crop yields. Once this one-off effect had worn off, economic output in the second quarter is set to have made slight gains at the most. Economic activity is likely to have maintained a muted upward underlying trend in the first half of the year. The long-standing restrictive monetary policy curbed growth. High inflation, the depreciation of the real and signs of an overheating economy had caused the central bank to increase key interest rates sharply from the end of 2024 onwards. While consumer price inflation stabilised recently at around 5.5 %, it remained above the target corridor of the central bank. The high tariffs in the goods trade with the United States in force since the start of August are also likely to weigh on the economy in the next few months.
The underlying trend in the Russian economy remained weak. According to the flash estimate of the national statistics office, economic output rose by 1.1 % year on year in the second quarter of 2025, down from + 1.4 % in the previous quarter. Overall, there are growing signs that the Russian economy has now entered a slowdown phase following the years marked by a buoyant upturn, albeit largely driven by government demand stimulus. The performance of the non-military sectors of the economy, in particular, is very weak. An important role is played here by the tight monetary policy necessitated due to the sharp increase in inflation. This has caused investments to decline and private consumption to lose momentum. The bottlenecks on the labour market have nevertheless persisted and the unemployment rate remained at a very low level at 2.3 %. Consumer price inflation declined to 8.8 % in July. Against this backdrop, the central bank has lowered the key interest rate in two steps since June from an exceptionally high level by a total of 300 basis points to 18 %.
1.3 Tariff effects obscuring slowdown of underlying pace of the economy in the United States
Real GDP in the United States picked up markedly in the second quarter. According to initial estimates, it rose by 0.7 % in the second quarter in seasonally adjusted terms compared with the previous period. As in the previous quarter, the GDP result was largely shaped by tariff-related fluctuations in imports. While imports surged in the first quarter in anticipation of tariff increases, they tumbled in the second quarter due to the dramatic rise in US import tariffs. There was a sharp fall in particular in imports from China. Final demand was increasingly met from the amply stocked inventories. Exports declined slightly.
Beyond the tariff-related special effects, the underlying cyclical momentum weakened further. The growth rate of private domestic final demand, which was already noticeably down at the start of the year, eased further slightly in the second quarter. Private consumption only grew modestly. The high level of uncertainty concerning the economic policy of the new US administration and fears of a renewed surge in inflation dampened consumers’ spending mood. Growth of gross fixed capital formation virtually ground to a halt. While corporate investment in machinery and equipment continued to rise, commercial construction investment fell significantly. Mortgage interest rates, which are fairly high in a medium-term comparison, left their mark there and in housing investment. Employment growth already largely ground to a halt in May. It is only because the labour supply shrank due to the tightened immigration policy that the unemployment rate remained unchanged until July.
The tariff hikes are set to place an increasing burden on the US economy. As this report went to press, the average effective tariff rate of the United States came to 16 %, which is more than 14 percentage points higher than at the start of the year. 6 While importers and retailers initially absorbed the higher costs of imported goods by reducing their price mark-ups, passing on the tariffs to end consumers now appears to be slowly getting underway. The inflation rate amounted to 2.7 % in July, up from 2.3 % in April. Core inflation excluding food and energy also increased, to 3.1 %. Inflationary momentum is also likely to arise in the medium term from the recently adopted Budget Act that includes a reduction in the tax burden for businesses and households and is therefore set to stimulate aggregate demand. 7 Against this backdrop, the US Federal Reserve left key interest rates unchanged in July.
1.4 Muted economy in Japan
Japan's economic output grew perceptibly in the second quarter. According to the initial estimate, GDP recorded growth of 0.3 % after adjustment for price and seasonal effects compared with the previous quarter. Consumers upped their expenditure again, and business investment saw lively growth. In addition, exports rose strongly despite the United States' protectionist trade policy. Looking ahead, the associated burden on the economy is likely to increase, however. The agreement between the United States and Japan includes a US import tariff of 15 % for most Japanese goods. 8 The labour market situation remained favourable. The unemployment rate remained at 2.5 % in June. The high consumer price inflation by Japanese standards slowed to 3.3 % year on year in June. However, the core rate excluding energy and food remained stable at 1.6 %. Against this backdrop, the Japanese central bank left its key rate unchanged at 0.5 % in July.
1.5 Economic performance in the United Kingdom losing momentum
The British economy failed in the second quarter to maintain the high growth rate of the first quarter. Real GDP rose in seasonally adjusted terms by 0.3 % compared with the previous period. There was a slowdown above all in the expansion of the services sector that is particularly important for the economy as a whole. Manufacturing output, which benefited in the first quarter from front-loading effects in anticipation of higher US import tariffs, increased only slightly. Construction activity, meanwhile, rose significantly. The labour market cooled further. Annual wage growth fell to 4.6 % in the second quarter but this was still significantly above the annual rate of the Harmonised Index of Consumer Prices (HICP). This rose to 3.6 % in June, due in part to the increase in regulated energy prices. The core rate likewise went up, to 3.7 %. In view of the weakening economy, the Bank of England cut its key interest rate to 4 % at the start of August.
1.6 Polish economy maintaining growth rate
The economy in Poland continued its fairly strong growth in the second quarter. According to preliminary data, real GDP rose by 0.8 % in seasonally adjusted terms compared with the previous quarter, up from 0.7 % in the first quarter. Activity in various service sectors picked up noticeably. Industrial production was also expanded again following the decline in the previous quarter, with capital goods production in particular rising sharply. However, construction output fell markedly. On the expenditure side, private consumption is likely to have increased sharply again. Households’ purchasing power is set to have risen significantly in part thanks to the fall in annual inflation to 3.1 % at last count. The labour market remained tight; gross wages in the corporate sector increased sharply, growing by 9.1 % year on year. Nevertheless, a slight rise in the unemployment rate to 3.5 % points to first signs of easing. Since the beginning of the year, the Polish central bank has reduced its key interest rate by a total of 75 basis points to 5.0 %.
Supplementary information
Convergence of EU Member States in central and eastern Europe under pressure
Last year, economic recovery from the turbulence caused by Russia’s war against Ukraine accelerated in the central and eastern European EU Member States. Private consumption was a major contributor to strengthening growth. Thanks to easing inflation, wage increases – considerable in some cases – and employment growth, the purchasing power of private households improved again. Government consumption also saw a significant increase. Gross fixed capital formation, on the other hand, was unable to maintain the previous year’s high level. 1 This affected investments in both infrastructure and machinery and equipment; there had already been a decline in residential construction. Exports of goods and services rose only slightly, mainly because of weak demand from the euro area. Imports, on the other hand, were up significantly. Overall, the real gross domestic product (GDP) of the central and eastern European EU Member States rose by 1.9 % in 2024, compared with 1.0 % in the EU as a whole. This means that convergence advanced further, although it took distinctly smaller steps than when compared over the medium term.
The economic situation improved in most central and eastern European EU Member States. In Poland, growth accelerated perceptibly. Private and government consumption increased significantly. The same applied to investment in machinery and equipment, in particular vehicle fleet investment. In Czechia, economic output expanded moderately, driven by private and government consumption. Croatia, Lithuania and Bulgaria saw a marked rise in activity, while Slovakia largely maintained its high pace of growth. In contrast, growth in Romania and Slovenia slowed perceptibly, primarily due to declining investment activity. In Romania, exports also contracted. In Hungary, GDP growth almost stagnated as the year went on, with private consumption the only factor stabilising the economy. Hungary’s weak growth should also be seen in the context of the blocking of EU funds due to violations of the rule of law. This had a major impact on the financing of infrastructure projects and other investments. 2 In Estonia and Latvia, economic output declined year-on-year. Estonia’s economic situation went on to stabilise in the course of the year, while it deteriorated considerably in Latvia due to falling investment and exports.
Table 1.1: Economic performance, unemployment and consumer prices in the central and eastern European EU Member States %
GDP growth
Unemployment rate1
Inflation rate
2023
2024
2023
2024
2023
2024
EU11 average
0.8
1.9
4.1
4.1
10.8
3.8
Euro area Member States
Estonia
− 3.1
− 0.3
6.4
7.6
9.1
3.7
Croatia
3.3
3.9
6.0
5.1
8.4
4.0
Latvia
2.2
− 0.4
6.5
6.9
9.1
1.3
Lithuania
0.4
2.7
6.8
7.1
8.7
0.9
Slovakia
2.2
2.1
5.8
5.4
11.0
3.2
Slovenia
2.3
1.5
3.6
3.7
7.2
2.0
EU Member States not in the euro area
Bulgaria
2.0
2.7
4.3
4.2
8.6
2.6
Poland
0.1
2.9
2.8
2.9
10.9
3.7
Romania
2.4
0.8
5.6
5.4
9.7
5.8
Czechia
0.2
1.1
2.6
2.7
12.0
2.7
Hungary
− 0.7
0.5
4.1
4.4
17.0
3.7
Sources: Eurostat and Bundesbank calculations. 1 ILO definition, seasonally adjusted.
The rise in consumer prices slowed considerably in the central and eastern European EU Member States but remained above the EU average. The average inflation rate of this group of countries, as measured by the Harmonised Index of Consumer Prices (HICP), fell from its high of 16.7 % in February 2023 to 3.3 % in June 2024, primarily because of the energy component. The inflation rate went up again after that for reasons that include the scaling back of measures to dampen energy and heating costs. In addition, food price rises drove up inflation. The rate of inflation was 3.8 % in 2024 as a whole, following 10.8 % in the previous year. The core rate (excluding energy and food) was 4.8 %, down from 9.6 %. By June 2025, the rate of inflation rose slightly to 4.0 %, while the core rate declined to 3.6 %.
Wage increases remained high in the face of tight labour markets and significant inflation in most central and eastern European EUMember States. In 2024, average compensation per employee went up by 11.6 %, compared to a 13.7 % rise the year before. The rapid increase in wages was fuelled by the persistently tight situation in the labour market. Weighted average unemployment rates remained at a low level, but rose distinctly, particularly in the Baltic states. Nevertheless, wage increases slowed markedly in the course of the year, reaching 10.1 % in the fourth quarter. Wages rose particularly sharply in Member States outside the euro area. Although wage growth was more moderate in the other countries, the average rate was more than twice as high as in the euro area. 3 The strong wage increases contributed significantly to gains in purchasing power, but also kept core inflation high and weighed on cost competitiveness.
In the course of 2024, the central banks of the central and eastern European EU Member States outside the euro area paused the cautious interest rate cuts they had started in 2023. The reason was the renewed pick-up in inflation in the second half of 2024. Poland’s central bank kept its key interest rate at 5.75 % from back in October 2023 and proceeded to reduce it in stages to 5.0 % only in 2025. Romania’s and Hungary’s central banks have held their key interest rates steady at 6.5 % since August and September 2024, respectively. The Czech National Bank has been cutting its key interest rate since the end of 2023 as the inflation rate has been in its target corridor since the beginning of 2024.
Government finances deteriorated in several central and eastern European EU Member States. Government income failed to keep pace with the strong expenditure growth, particularly in Poland and Romania. This was fuelled to a significant extent by sharp rises in public-sector wages, pensions and social spending as well as defence and interest costs. 4 Although the assistance measures to cushion high energy and food prices were gradually reduced, pressure on government finances remained high. Several countries failed to comply with the EU’s budgetary rules. As a result, the European Commission recommended initiating an excessive deficit procedure (EDP) against Poland, Hungary and Slovakia as early as in 2024. Romania has been undergoing an EDP since 2020 and has to date not taken effective action to correct the deficit, and this is why the Council is keeping the procedure open. 5
The economic convergence of the central and eastern European EU Member States with the EUaverage continued in small steps. As the economic recovery accelerated, there was moderate convergence progress in 2024, as in the year before. In the two previous years, convergence had faltered as a result of the negative impacts of the pandemic and Russia’s war of aggression against Ukraine. Analysis of the last four years taken together shows that the convergence process has slowed significantly compared to the years before. Most recently, the central and eastern European EU Member States reached an average of just over 80 % of the EU’s economic output, measured in terms of gross domestic product per capita in purchasing power parities. There were still considerable differences between individual countries, although the gap has closed over time. Czechia, Slovenia and Lithuania attained around 90 % of the EU average in 2024, while Poland recorded just under 80 %. Bulgaria still had the furthest to go in terms of convergence, although the country has made significant progress in recent years.
There is a risk this year that the economic development of the central and eastern European EUMember States will be hampered by the United States’ tighter trade policy. At least some of the countries are highly dependent on foreign trade. The percentage of GDP attributable to exports varies between 85.1 % for Slovakia and 35.6 % for Romania. Direct dependence on exports to the United States is particularly high in Lithuania, where they account for 5 % of total goods exports, and in Slovakia and Estonia, at just over 4 %. In a number of countries, integration into global supply chains is a considerable factor. Poland, Czechia, Hungary and Slovakia are particularly vulnerable because of their strong ties with Germany – especially in the automotive and supply industry.
Table 1.2: Export orientation and degree of foreign trade linkage of the central and eastern EuropeanEUMember States %
Export ratio
US export share
Share of foreign-controlled enterprises in gross value added1
2024
2024
2022
EU11 average
58.3
3.1
37.5
Euro area Member States
Estonia
76.4
4.1
34.8
Croatia
49.9
3.3
35.8
Latvia
64.7
2.8
35.3
Lithuania
74.1
5.0
30.3
Slovakia
85.1
4.2
51.5
Slovenia
81.9
1.3
28.4
EU Member States not in the euro area
Bulgaria
56.3
2.5
31.1
Poland
52.4
3.3
38.4
Romania
35.6
2.5
41.6
Czechia
68.8
2.7
44.8
Hungary
74.5
3.5
40.8
Sources: Eurostat,IMF Direction of Trade Statistics and Bundesbank calculations.
The export ratio represents exports of goods and services relative to GDP. The US export share represents goods exports to the United States as a share of total goods exports. 1 Most recent available data: 2022.
Structural factors, such as demographic decline and ageing as well as institutional weaknesses are putting the convergence progress of the central and eastern European EU Member States at risk. Populations in the region are shrinking and ageing fast. This tightens the supply of labour, dampens productivity growth and increases the pressure on general government budgets. According to projections of the European Commission, populations in Latvia, Lithuania, Bulgaria, Croatia and Romania face a decline of more than 20 % by 2070, compared to a decrease of just under 5 % for the EU. 6 The negative impact of population ageing and decline could be countered with institutional reforms. According to the World Bank’s Worldwide Governance Indicators on government effectiveness, regulatory quality and control of corruption, this group of countries still falls considerably short of the EU average, 7 despite certain advances in a number of countries. There have, however, been setbacks in individual countries, specifically Hungary, Bulgaria and Slovakia. 8 The EU also addresses these problems through its Next Generation EU(NGEU) support package, whose key element, the Recovery and Resilience Facility, ties investments to reforms specifically targeted at structural weaknesses in an effort to strengthen economic convergence. The included measures are also aimed at strengthening integrity and the rule of law, expanding digital administrative structures and increasing transparency and efficiency in the public sector. 9
2 Renewed increase in economic output in the euro area
Economic output in the euro area recorded a further slight rise in the second quarter following strong growth in the first quarter. According to Eurostat’s flash estimate, GDP increased by 0.1 % in price and seasonally adjusted terms compared with the previous quarter (0.2 % if Ireland is excluded 9 ). Front-loading effects in anticipation of higher tariffs in trade with the United States had further boosted activity in the first quarter. The rebound effect to be expected after this was fairly contained. Although exports fell slightly, domestic demand continued its moderate upward trend. The situation in the manufacturing sector actually improved further. However, the outlook remained subdued. While the expectation indicators overall do not yet point to any further slowdown in growth, the tariff agreement reached at the end of July is likely to particularly curb exports. By contrast, the moderate inflation rates, more favourable financing conditions and announced expenditure programmes should support the economy. All in all, there are currently no signs of any noticeable dampener to aggregate activity. However, considerable risks exist given that trade policy and geopolitical developments are, at present, almost completely unpredictable.
Private consumption grew further. Retail sales rose noticeably again, and new motor vehicle registrations expanded markedly up until May. Households' increased readiness to make major purchases was undoubtedly a contributory factor. Price-adjusted sales in the hotel and restaurant sector are even likely to have risen substantially. Private consumption remains supported by the favourable development of wage income against the backdrop of moderate inflation rates. However, overall consumer confidence only recovered tentatively in the second quarter and remained below its long-term average.
Investment activity increased again. 10 Construction production grew considerably until May. As well as infrastructure measures, residential construction undoubtedly also played a role here. At any rate, the number of building permits has been rising noticeably for some time. Investment in machinery and equipment is also likely to have increased. A significant upturn was recorded for capital goods producers’ sales in euro area trading in April and May, and capital goods imports also expanded perceptibly. Expenditure on information and communication technologies and on intellectual property products is set to have continued its upward trend on the back of increasing digitalisation.
Goods exports to third countries declined noticeably following the sharp rise at the start of the year. Exports of intermediate and capital goods in particular were down, while exports of consumer goods fared better. There was a decline above all of exports to the United States, which had previously risen particularly sharply primarily due to front-loading effects. Exports to China also fell. By contrast, there was an increase in exports to the United Kingdom. Euro area services exports decreased until May, according to balance of payments data. Imports of goods from third countries were somewhat higher in the second quarter in price-adjusted terms. Imports of consumer and intermediate goods fell following strong growth in the previous quarter, while capital goods imports made gains.
Activity in the manufacturing sector fell. The production of intermediate goods, in particular, decreased markedly. However, capital goods production grew in the second quarter, while the production of consumer goods was also up. Particularly strong growth was recorded for motor vehicles. The renewed increase in motor vehicle production suggests that the economic situation has improved there. Nevertheless, industrial capacity utilisation stagnated and remained below its long-term average. By contrast, according to European Commission surveys, there was an improvement in competitiveness and new orders were also only slightly below their long-term average. Price pressure at the producer level decreased thanks to lower energy prices. Year-on-year producer prices practically stagnated, and import prices actually fell.
Services expanded modestly. Only the accommodation and food services sector registered a noticeable pick-up in business activity. By contrast, activity in the information and communication sector and in the real estate sector only increased moderately, and in transport and logistics it is likely that it actually declined markedly. According to European Commission surveys, a shortage of labour continues to weigh on the services sector. Meanwhile, companies recently complained less about insufficient demand or financial obstacles.
Economic output only grew moderately in most Member States. Falling exports curbed activity in many places. In several countries in which there were noticeable front-loading effects in the preceding quarter, real GDP actually fell in comparison with the first quarter. At the same time, the significant upturn in private consumption and construction activity supported the economy, in particular in some of the southern Member States.
French economic growth increased somewhat in the second quarter. According to a first estimate, real GDP rose by 0.3 %, up from 0.1 % in the previous quarter. Private consumption and exports were slightly up, while investments, above all in machinery and equipment, fell. However, inventory restocking made a significant growth contribution that originated from the manufacture of aircraft. Imports once again increased significantly. On the output side, the business activity of service providers grew noticeably and that of the manufacturing sector somewhat. There was a noticeable upturn in construction for the first time since mid-2023.
Economic output declined slightly in the second quarter in Italy. According to preliminary data, real GDP fell by 0.1 %, after rising by 0.3 % in the previous quarter thanks in part to tariff-related front-loading effects. The key factor behind this was the fact that goods exports returned to normal after having increased noticeably in the first quarter. Industrial production also declined again somewhat. By contrast, domestic demand continued to recover. Private consumption can be expected to have risen again thanks to higher real disposable incomes. Investment activity is also likely to be continuing to point upwards. However, services activity stagnated.
The Spanish economy continued to grow strongly. According to a preliminary estimate, real GDP rose by 0.7 % in the second quarter of 2025, up from 0.6 % in the first quarter. Growth remained broad-based. Private consumption and investment activity made significant gains, while government consumption declined slightly. Exports increased markedly and imports even rose considerably. On the output side, construction in particular grew strongly. There was also a significant upturn in activity in services and manufacturing.
The picture for the remaining Member States was mixed. Economic output rose moderately in Belgium, modestly in Lithuania and Estonia, marginally in the Netherlands and Austria and stagnated in Finland. Real GDP declined somewhat in Ireland following particularly strong growth in the previous quarter.
The labour market situation remained stable. The number of employed persons rose again somewhat in the second quarter, but at a considerably lower rate than the average of the past few quarters. The unemployment rate fell slightly to 6.2 % and appears to have bottomed out. The fact that the labour shortages have eased both in industry and among service providers in the past few quarters also suggests that the labour market situation has stabilised. However, they still remain above the long-term average, particularly among service providers. The job vacancy rate has already been in decline for several quarters. Wage growth per employee is likely to have slowed further in the second quarter of 2025 to hardly more than 3 %.
Consumer prices in the euro area picked up somewhat less in the second quarter of 2025 than previously. The HICP recorded a quarter-on-quarter increase of just 0.2 % on a seasonally adjusted basis, the lowest quarterly rise since 2020. Energy prices, which fell sharply again following the marked increase in the previous quarter, were the decisive factor. The prices of industrial products excluding energy also remained virtually unchanged. However, service prices continued to rise substantially and in fact somewhat more sharply than in the two preceding quarters. Food price inflation likewise picked up again slightly.
Annual inflation fell to 2.0 %. This was above all attributable to energy prices, which, in contrast to the previous quarter, once again made a negative contribution to headline inflation. Services inflation likewise declined but remained high at 3.5 %. Price inflation for non-energy industrial goods remained unchanged. Only food inflation picked up again slightly. Core inflation (excluding energy and food) stood at 2.5 %, which is still well above the average of the last 25 years, despite having fallen for the third time in succession.
According to the Eurostat estimate, headline inflation stayed put at 2.0 % in July 2025. The inflation rates for energy, food and non-energy industrial goods were somewhat higher in July than in June. By contrast, the disinflation process for services continued. However, at 3.1 %, inflation here is still 1 percentage point above its longer-term average. Owing to the opposing developments for non-energy industrial goods and services, the core inflation rate (excluding energy and food) in July remained unchanged at 2.3 %. In the coming months, the headline rate is set initially to remain virtually unchanged and then to fall somewhat. The main reasons for this development are the ongoing disinflation process for services, more sharply falling energy prices and the external value of the euro, which remains slightly elevated.
The indicators for the current quarter currently point to a continuation of the moderate upswing but the tariff agreement reached at the end of July will weigh on export activity. Sentiment indicators up to the end of July, but based on data preceding the announcement of the tariff agreement between the EU and the United States, do not point to a deterioration of the current situation. Production expectations for the months to come actually improved. The assessment of new orders in the construction sector remained unchanged and declined slightly in manufacturing. Furthermore, sentiment among consumers remained subdued. Household expectations regarding the future economic situation and their own financial circumstances deteriorated noticeably. Exports to the United States are set to suffer from the additional US tariffs. This could dampen the recovery in manufacturing. However, the domestic economy should continue to expand moderately. The more favourable financing terms, lower commodity prices, moderate inflation and the continued positive labour market situation are supporting the economy. Growth momentum can also be expected in the medium term from the announced fiscal expenditure programmes. All in all, activity in the euro area should expand slightly in the second half of the year.
This article is based on data available up to 19 August 2025, 11:00.
List of references
Bernard, S., L. de Greef, I. Hurst, A. I. Kaya, I. Liadze and B. Naisbitt (2024), The Effects of Higher US Tariffs, National Institute of Economic and Social Research, Global Economic Outlook Topical Feature, October 2024, pp. 64- 77.
