PMI data released today will be closely scrutinised to gauge how the eurozone economy has navigated uncertainty triggered by Trump’s tariffs threats. Besides some sentiment effect, it is too early to assess the impact on the economy of Germany’s bold policy response to recent geopolitical events, with a commitment to heavily invest domestically.
Uncertainty caused by Trump’s tariffs risks undermining economic activity in the eurozone. In our view, import frontloading by US firms will help offset the fallout from a trade war in the short term. This should be visible in today’s PMIs. Over the longer term, Germany’s fiscal “bazooka” and Europe’s new defence strategy will be important supporting factors.
We expect the eurozone composite PMI to move more firmly into expansion territory, to 51 from 50.2, tentatively pointing to a modest pickup in economic activity at the end of the first quarter, albeit from low levels.
Firms typically adjust their sourcing behaviour in response to higher tariffs or the threat of them, frontloading imports before new measures are implemented. Our chart shows the relationship between the quantity of purchases sub-index of the US manufacturing PMI and the new export orders sub-index of the eurozone manufacturing PMI.
The two series are highly correlated, although there is no clear lead pattern for turning points. The improvement in the flow of new export orders received by eurozone firms since late last year appears to have occurred in the context of an improvement in the amount of inputs purchases by US firms. This suggests that eurozone firms are likely to have benefited from the frontloading of purchases of critical materials and of intermediate goods by US firms in anticipation of (presumed) higher tariffs on imports.
The positive growth impulse from import frontloading by US firms could be short-lived. If the Trump administration goes ahead with its plan to introduce reciprocal tariffs on 2 April, American companies will be forced to reconsider their sourcing strategies for critical inputs. Throughout the rest of 2025, the eurozone economy would likely rather benefit from a moderate acceleration in private consumption fuelled by rising real wages and by likely two more cuts by the ECB.
Germany’s recent historical fiscal U-turn and Europe’s defence plans, instead, will lift business optimism across the eurozone, although any concrete spillover to eurozone GDP growth is unlikely to materialise before next year.
