Manufacturing versus services: how frontloading and uncertainty shaped recent developments

Prepared by Niccolò Battistini and Johannes Gareis

Published as part of the ECB Economic Bulletin, Issue 6/2025.

Manufacturing activity returned to growth in early 2025, while services activity slowed, marking a reversal of the previous trends in the two sectors. Hard data on production show that manufacturing activity contracted significantly in 2023 and 2024. In the first quarter of 2025, however, manufacturing rebounded as the contraction in the euro area excluding Ireland came to an abrupt halt, while the expansion in Ireland accelerated (Chart A). By contrast, services activity, which had continued to expand in the previous two years, lost momentum. Survey data on business perceptions from the European Commission corroborate this reversal. Manufacturing firms indicated a marked rise in perceived activity, which, however, remained below its long-term average. Conversely, services firms reported a fall in perceived activity below its historical norm. The earlier divergence between manufacturing and services reflected the energy-induced inflation surge and the ensuing monetary policy tightening, which weighed particularly on manufacturing, while services were supported by the post-pandemic normalisation of consumption patterns.^[1] While some of these drivers have reversed, new factors have emerged. Temporary frontloading ahead of higher US tariffs likely supported the manufacturing rebound, while rising uncertainty surrounding trade policy (and, more broadly, economic policy) appears to have dampened overall activity. This box examines frontloading and trade policy uncertainty through the lens of granular sectoral data and discusses the short-term outlook for manufacturing and services activity.

Chart A

Production and perceived activity in manufacturing and services

(left-hand scale: quarter-on-quarter percentage changes and percentage point contributions; right-hand scale: standardised percentage balances)

Frontloading ahead of higher US tariffs likely provided a temporary boost to manufacturing activity in the first quarter of 2025. According to corporate surveys, frontloading reflected a temporary surge in US demand for euro area goods ahead of the tariff increases scheduled for April (Melemenidis et al., 2025). This is consistent with the timing and magnitude of the fluctuations in manufacturing output. Manufacturing output rose sharply in the first quarter after two years of decline, largely driven by a strong increase in March – when it peaked, before falling between April and June. Temporary frontloading effects are also evident when comparing the exposure of different sectors to exports to the United States with their output dynamics (Chart B). Output in sectors with higher US export exposure recorded a stronger increase in March (Chart B, panel a) and a sharper decline between April and June (Chart B, panel b). The pharmaceutical industry illustrates these dynamics most clearly, given its high US export exposure. Production in this sector rose by nearly 9% in March compared with February, then fell by a similar amount on average in the second quarter. Across countries, these developments largely reflected the high volatility of pharmaceutical output in Germany, the Netherlands and, most likely, Ireland.^[2]

Chart B

Manufacturing sector production and exposure to US exports

(period-on-period percentage changes)

a) March versus February	b) April-June average versus March

While manufacturing activity was temporarily supported by frontloading, rising trade policy uncertainty has likely contributed to the recent loss of momentum in services. Following the US Administration’s tariff announcement on 2 April, trade policy uncertainty surged to a historic high, well above the levels observed during previous episodes of trade tensions, such as the US-China disputes in President Trump’s first term (Chart C).^[3] Empirical evidence shows that trade policy uncertainty disproportionately weighs on business investment (Caldara et al., 2020; Andersson et al., 2024) and on related sectoral activity (De Santis and Zimic, 2019). Granular and timely survey data across sectors support this finding. During the first Trump Administration, perceived activity declined among manufacturing and business services firms – both closely tied to business investment – while remaining resilient among consumer services firms (Chart C, panel a).^[4] Similarly, at the current juncture, heightened trade policy uncertainty has likely weighed more on manufacturing and business services than on consumer services. In the case of manufacturing, however, this negative impact has so far been amply offset by positive frontloading effects, which have temporarily boosted output (Chart C, panel b).

Chart C

Trade policy uncertainty and perceived activity in manufacturing and services

(left-hand scale: cumulative changes in standardised percentage balances; right-hand scale: cumulative change in standardised index)

Several factors are driving the outlook for manufacturing and services, with no clear signal yet as to which will prevail. European Commission survey data indicate that activity has fallen somewhat in consumer services, while recovering slightly in business services, in the third quarter to date, as trade policy uncertainty has abated (Chart C, panel b). Moreover, manufacturing activity has risen further above its level at the start of the year. Looking at risks from uncertainty, if trade policy uncertainty were to remain elevated by historical standards, its dampening effects could continue to weigh on services and become visible in manufacturing as frontloading unwinds. However, the trade agreement between the EU and the United States could trigger a fast decline in such uncertainty, mitigating some of its adverse effects. In addition to uncertainty-related risks, other factors are likely to shape the outlook. Headwinds stem from the appreciation of the euro and the impact of higher tariffs, while delayed effects from monetary policy loosening and possible support from increased spending on defence and infrastructure provide countervailing tailwinds.

References

Andersson, M., Bobasu, A. and De Santis, R.A. (2024), “What are the economic signals from uncertainty measures?”, Economic Bulletin, Issue 8, ECB.

Azqueta-Gavaldón, A., Hirschbühl, D., Onorante, L. and Saiz, L. (2019), “Sources of economic policy uncertainty in the euro area: a machine learning approach”, Economic Bulletin, Issue 5, ECB.

Battistini, N. and Gareis, J. (2023), “Monetary policy and the recent slowdown in manufacturing and services”, Economic Bulletin, Issue 8, ECB.

Caldara, D., Iacoviello, M., Molligo, P., Prestipino, A. and Raffo, A. (2020), “The economic effects of trade policy uncertainty”, Journal of Monetary Economics, Vol. 109, January, pp. 38-59.

De Santis, R.A. and Zimic, S. (2019), “Domestic versus foreign factors behind the fall in euro area industrial production”, Economic Bulletin, Issue 6, ECB.

Gunnella, V. and Quaglietti, L. (2019), “The economic implications of rising protectionism: a euro area and global perspective”, Economic Bulletin, Issue 3, ECB.

Melemenidis, A., Morris, R. and Roma, M. (2025), “Main findings from the ECB’s recent contacts with non-financial companies”, Economic Bulletin, Issue 5, ECB.