ECB warning: Profitability of eurozone companies affected by trade tensions caused by the US administration

Eurozone companies remain optimistic about their growth prospects but face pressure on their profits, partly due to trade tensions, according to a study published this week by the European Central Bank (ECB), cited by Reuters.

The eurozone economy has grown at a slower pace in recent years, with the long-awaited recovery slow, but companies continue to employ a high number of employees amid optimism about a positive outlook.

According to the ECB survey, 8% of eurozone firms reported an increase in turnover in the past three months, and 23% are optimistic about the outlook for the coming quarter. However, companies continue to see their profits deteriorate, with the decline being more widespread among SMEs.

"Most companies reported being affected to some extent by trade tensions, with those exporting to the United States and those in the industrial sector being the most exposed,” the ECB said.

Around 30% of companies expressed concerns about delays or shortages in supply chains, forcing them to look for alternative suppliers, the ECB said.

"The main strategies for adapting to a changing trading environment include redirecting sales to EU and domestic markets and restructuring supply chains,” the source said.

In contrast, longer-term inflation expectations remained unchanged, with companies reducing their expectations for price growth next year to 2.5% from 2.9%, the ECB said.

Eurostat data showed that the annual inflation rate in the euro area rose to 2% in June (the ECB's target), from 1.9% in May.

• Eurozone banks see loan demand rise

Demand for loans from eurozone firms rose in the last quarter despite geopolitical and trade tensions, and a further advance is likely this quarter, the ECB said, based on a survey of the bloc's largest lenders, according to Reuters.

Bank loans, the main source of financing for businesses, have recovered slowly over the past year as the ECB has rapidly cut interest rates and firms have remained relatively upbeat about their prospects despite the trade standoff with the United States.

"Demand for loans was supported by falling interest rates, but was tempered by global uncertainty and trade tensions," the ECB said in its quarterly survey of 155 lenders.

The ECB is expected to keep interest rates on hold at its policy meeting this week, but will keep the "door open” for further easing in 2025.

Credit standards remained unchanged for businesses last quarter, despite earlier expectations of a modest tightening, and lenders see little change in the current quarter, the source said.

While risks to the economic outlook are on the agenda, banks did not report any specific additional tightening related to geopolitical uncertainty and trade tensions, the ECB added.

Lending standards tightened in commercial real estate, manufacturing, wholesale and retail trade and construction, while easing slightly for most services.

Demand for housing loans continued to grow substantially in the last quarter, and banks are recording further rapid progress in the third quarter, the ECB said, noting: "Mortgage lending standards tightened slightly, but banks are recording a modest easing in the current quarter.”

For consumer loans, there was a more pronounced tightening of standards in the last quarter, and banks anticipate further tightening in the future.