Despite signs of improvement in the wider European economy, 2024 was a challenging year for the manufacturing sector. High energy prices significantly reduced the competitiveness of many businesses, and rising labour costs in response to the cost-of-living crisis exacerbated this issue. Additionally, a slowdown in global trade decreased demand for the sector, which relies heavily on exports. Many critics and industry insiders believe that Europe’s push towards net zero has further hindered recovery as manufacturers face increased regulatory burdens.

As we move into 2025, headwinds to global trade will continue to slow the manufacturing sector. Firstly, the return of Donald Trump to the Oval Office has led to a significant shift in US trade and diplomatic policies. Tariffs have been aggressively used to secure concessions from Canada and Mexico on border security and a 10% tariff on all imports from China. Trump’s recent tariffs, set to take effect in April, will impose a 25% tariff on imported steel and aluminium. These commodities account for approximately 1% of Europe’s total goods exports to the US. More recently, a 25% tax on the automotive sector has been suggested by Trump, although in both cases, these tariffs were suggested during his first presidency before being retracted as trade negotiations were conducted.

Oxford Economics has revised its eurozone GDP growth forecasts, reducing them by 0.3 percentage points to 0.9% in 2025 and 1.2% in 2026 due to stronger protectionism assumptions. This forecast assumes that the Trump administration will impose a 10% blanket tariff on imported goods from the EU, which is expected to retaliate. The secondary effects of these tariffs are likely to impact investment decisions, particularly in non-residential private investment. However, based on the experience with Canada and Mexico, these tariffs may be quickly withdrawn if a deal is struck, though the outlook remains uncertain.

Another factor dragging on manufacturing activity is the slowdown in China’s domestic economy. Weaker domestic demand for manufactured goods has increased the flow of cheap Chinese products into global markets, further suppressing demand for less competitive European goods.

Despite these challenges, there are reasons for optimism in 2025. Strong wage growth has driven an increase in real household disposable income, which grew by 2.5% in 2024. Higher incomes are expected to boost consumer expenditure and retail spending. Retail spending in real terms rose by 1.1% in 2024 but is forecast to accelerate to 2.6% in 2025 and 2.5% in 2026. This should drive greater demand for logistics space by retailers and third-party logistics providers (3PLs). Europe’s labour market remains tight in early 2025, supporting further wage growth and, in turn, disposable incomes and consumption. Additionally, the outlook for online retail is also very positive, with Statista forecasting revenue growth of 12.0% year-on-year in 2025 for Europe.

Finally, the trajectory of interest rates is worth considering. The European Central Bank (ECB) continued to cut the base rate in early 2025, with a 25 basis point cut. This will positively affect the consumer economy through cheaper mortgage rates, freeing up additional disposable income for consumers. This is important not only for the consumer component but also for the manufacturing component of demand in the European logistics market. Cyclical increases in consumption may help spur a recovery in European manufacturing later this year, potentially mitigating some of the current headwinds facing the sector.

_{Read the articles within Spotlight: European Logistics Outlook – Q4 2024 below.}