The European Central Bank (ECB) reports a “significant slowdown in economic growth during the second quarter” for the eurozone and predicts “moderating momentum in the near term against a backdrop of high uncertainty.” According to its latest economic bulletin, recent surveys indicate “only modest expansion overall in both the manufacturing and services sectors.”
The ECB highlights that higher actual and anticipated tariffs, a strengthening euro, and persistent geopolitical uncertainty are reducing businesses’ willingness to invest. It further notes that “inflation prospects are more uncertain than usual due to volatility in the global trade policy landscape.” Annual inflation reached 2.0% in June 2025, up from 1.9% in May, with underlying inflation indicators broadly consistent with the Governing Council’s medium-term 2% target.
However, the central bank outlined significant risks to the inflation outlook. A stronger euro could push inflation lower than expected. Conversely, inflation could rise if higher tariffs trigger reduced demand for euro area exports and a shift towards imports from countries like China with excess production capacity. The ECB also warned that fragmentation in global supply chains could drive up import prices and tighten domestic capacity constraints, boosting inflation. Increased spending on defense and infrastructure, alongside extreme weather events and the unfolding climate crisis, could also push food prices and overall inflation higher than anticipated.
Meanwhile, falling interest rates are stimulating household mortgage demand within the eurozone. In contrast, tariffs and geopolitical tensions are acting as a brake on corporate credit. The ECB bulletin states that “Banks’ concerns about clients’ economic risks had a tightening impact on credit standards,” though this was largely offset by increased competition among lenders. Consequently, corporate loan demand saw a slight increase in Q2, aided by lower rates. Nonetheless, businesses maintained caution due to global uncertainty and trade tensions.
“Many banks cited the dampening effect of global uncertainty and related trade tensions on corporate loan demand,” the report specified. For housing loans, the ECB attributes the strong surge in demand primarily to falling interest rates, improved residential real estate market prospects, and, to a lesser extent, rising consumer confidence.