Euro zone companies warn of slowing economy, China competition, ECB poll shows

An ECB survey of 72 large euro zone companies indicates a significant economic slowdown, particularly in manufacturing and services, attributed to U.S. tariffs, geopolitical tensions, and increased competition from Chinese goods seeking alternative markets. This has resulted in a subdued outlook for employment and prices, with wage growth projected to decelerate to 3.3% this year and 2.8% in 2026, down from 4.5% last year. The survey's findings present a more challenging economic picture for the bloc, contrasting with the ECB's recent modestly upbeat assessment and decision to maintain interest rates.

Analysis

A European Central Bank (ECB) survey of 72 large companies paints a notably more pessimistic picture of the euro zone economy than the central bank's recent public assessment. The survey, conducted between June 23 and July 2, indicates a slowdown in both manufacturing and services, with business and consumer confidence dented by U.S. tariffs and geopolitical uncertainty. This has led to expectations of 'very modest growth' for the second and third quarters and a subdued outlook for employment and prices. A key transmission mechanism highlighted is the intensifying competition from Chinese goods, a direct result of trade diversion as Chinese exporters seek alternative markets to the U.S. While this has so far primarily affected intermediate goods, it is expected to broaden, posing a risk to corporate margins. Furthermore, wage growth forecasts are decelerating, projected to fall from 4.5% last year to 3.3% this year and 2.8% in 2026, signaling disinflationary pressures that challenge the ECB's recent decision to hold rates steady.

Key Decisions for Investors

• Investors should re-evaluate exposure to European equities, particularly in cyclical and manufacturing sectors that are most vulnerable to the reported slowdown and increased competition from diverted Chinese trade.
• Monitor for a potential dovish pivot from the ECB, as the survey's pessimistic findings on growth and inflation contrast with the bank's recent 'modestly upbeat' stance, creating policy uncertainty.
• Scrutinize companies with significant European supply chains for margin compression risk, as the influx of competitively priced Chinese intermediate goods is expected to broaden beyond its current limited scope.
• Consider underweighting euro-denominated assets given the headwinds of slowing growth, decelerating wage pressures, and unresolved trade tensions highlighted by the corporate survey.