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The Beige BookSummary of Commentary onCurrent Economic Conditions byFederal Reserve DistrictAugust 2025F E D E R A L R E S E R V E S Y S T E MContentsAbout This Publication.iiNational Summary.1Federal Reserve Bank of Boston.5Federal Reserve Bank of New York.9Federal Reserve Bank of Philadelphia.13Federal Reserve Bank of Cleveland.17Federal Reserve Bank of Richmond.21Federal Reserve Bank of Atlanta.24Federal Reserve Bank of Chicago.28Federal Reserve Bank of St.Louis.32Federal Reserve Bank of Minneapolis.36Federal Reserve Bank of Kansas City.40Federal Reserve Bank of Dallas.44Federal Reserve Bank of San Francisco.48iAbout This PublicationWhat is the Beige Book?The Beige Book is a Federal Reserve System publication about current economic conditionsacross the 12 Federal Reserve Districts.It characterizes regional economic conditions and pros-pects based on a variety of mostly qualitative information,gathered directly from each Districtssources.Reports are published eight times per year.What is the purpose of the Beige Book?The Beige Book is intended to characterize the change in economic conditions since the lastreport.Outreach for the Beige Book is one of many ways the Federal Reserve System engageswith businesses and other organizations about economic developments in their communities.Because this information is collected from a wide range of contacts through a variety of formaland informal methods,the Beige Book can complement other forms of regional information gath-ering.The Beige Book is not a commentary on the views of Federal Reserve officials.How is the information collected?Each Federal Reserve Bank gathers information on current economic conditions in its Districtthrough reports from Bank and Branch directors,plus interviews and online questionnaires com-pleted by businesses,community organizations,economists,market experts,and other sources.Contacts are not selected at random;rather,Banks strive to curate a diverse set of sources thatcan provide accurate and objective information about a broad range of economic activities.TheBeige Book serves as a regular summary of this information for the public.How is the information used?The information from contacts supplements the data and analysis used by Federal Reserve econo-mists and staff to assess economic conditions in the Federal Reserve Districts.The qualitativenature of the Beige Book creates an opportunity to characterize dynamics and identify emergingtrends in the economy that may not be readily apparent in the available economic data.This infor-Note:The Federal Reserve officially identifies Districts by number and Reserve Bank city.In the 12th District,the SeattleBranch serves Alaska,and the San Francisco Bank serves Hawaii.The System serves commonwealths and territories asfollows:the New York Bank serves the Commonwealth of Puerto Rico and the U.S.Virgin Islands;the San Francisco Bankserves American Samoa,Guam,and the Commonwealth of the Northern Mariana Islands.The Board of Governors revisedthe branch boundaries of the System in February 1996.iimation enables comparison of economic conditions in different parts of the country,which can behelpful for assessing the outlook for the national economy.The Beige Book does not have the type of information Im lookingfor.What other information is available?The Federal Reserve System conducts a wide array of recurring surveys of businesses,house-holds,and community organizations.A list of statistical releases compiled by the Federal ReserveBoard is available here,links to each of the Federal Reserve Banks are available here,and a sum-mary of the Systems community outreach is available here.In addition,Fed Listens events havebeen held around the country to hear about how monetary policy affects peoples daily lives andlivelihoods.The System also relies on a variety of advisory councilswhose members are drawnfrom a wide array of businesses,non-profit organizations,and community groupsto hear diverseperspectives on the economy in carrying out its responsibilities.iiiThe Beige BookNational SummaryOverall Economic ActivityMost of the twelve Federal Reserve Districts reported little or no change in economic activity sincethe prior Beige Book periodthe four Districts that differed reported modest growth.AcrossDistricts,contacts reported flat to declining consumer spending because,for many households,wages were failing to keep up with rising prices.Contacts frequently cited economic uncertaintyand tariffs as negative factors.New York reported that“consumers were being squeezed by risingcosts of insurance,utilities,and other expenses.”Contacts observed the following responses tothe consumer pullback.Retail and hospitality sectors offered deals and promotions to help price-sensitive consumers stretch their dollarssupporting steady demand from domestic leisure tour-ists but not offsetting falling demand from international visitors.The auto sector noted flat toslightly higher sales,while consumer demand increased for parts and services to repair oldervehicles.Manufacturing firms reported shifting to local supply chains where feasible and oftenusing automation to cut costs.The push to deploy AI partly explains the surge of data centerconstructiona rare strength in commercial real estate noted by the Philadelphia,Cleveland,andChicago Districts.Atlanta and Kansas City reported that data centers had increased energydemand in their Districts.Overall,sentiment was mixed among the Districts.Most firms eitherreported little to no change in optimism or expressed differing expectations about the direction ofchange from their contacts.Labor MarketsEleven Districts described little or no net change in overall employment levels,while one Districtdescribed a modest decline.Seven Districts noted that firms were hesitant to hire workersbecause of weaker demand or uncertainty.Moreover,contacts in two Districts reported anincrease in layoffs,while contacts in multiple Districts reported reducing headcounts throughattritionencouraged,at times,by return-to-office policies and facilitated,at times,by greaterautomation,including new AI tools.In turn,most Districts mentioned an increase in the number ofpeople looking for jobs.However,half of the Districts noted that contacts reported a reduction inthe availability of immigrant labor,with New York,Richmond,St.Louis,and San Francisco high-lighting its impact on the construction industry.Half of the Districts described modest growth inwages,while most of the others reported moderate growth.Two Districts noted little or no changein wages.Note:This report was prepared at the Federal Reserve Bank of Philadelphia based on information collected on or beforeAugust 25,2025.This document summarizes comments received from contacts outside the Federal Reserve System andis not a commentary on the views of Federal Reserve officials.1PricesTen Districts characterized price growth as moderate or modest.The other two Districts describedstrong input price growth that outpaced moderate or modest selling price growth.Nearly allDistricts noted tariff-related price increases,with contacts from many Districts reporting that tariffswere especially impactful on the prices of inputs.Contacts in multiple Districts also reported risingprices for insurance,utilities,and technology services.While some firms reported passing throughtheir entire cost increases to customers,some firms in nearly all Districts described at leastsome hesitancy in raising prices,citing customer price sensitivity,lack of pricing power,and fear oflosing business.In some cases,as highlighted by Cleveland and Minneapolis,firms reportedbeing under pressure to lower prices because of competition,despite facing increased inputcosts.Most Districts reported that their firms were expecting price increases to continue in themonths ahead,with three of those Districts noting that the pace of price increases was expectedto rise further.Highlights by Federal Reserve DistrictBostonEconomic activity expanded slightly overall,but consumer spending was flat.Employment wasdown slightly,while wages and prices increased modestly.Home sales increased moderately froma year earlier.The outlook remained cautiously optimistic on balance,although tariff-related uncer-tainty dimmed the outlook for consumer spending.New YorkEconomic activity declined slightly as tariff-related uncertainty continued to weigh on businesses.Employment in the region was mostly unchanged,and wage growth remained modest.Sellingprices rose at a moderate pace,marking some acceleration since the previous reporting period,and input prices rose strongly.PhiladelphiaBusiness activity increased modestly in the current Beige Book period.Employment levels heldsteady,and wages rose at modest pre-pandemic rates.Firm prices rose moderately,straining bud-gets for many households and small businesses,and inflation expectations are higher still.Inaddition,tariffs and federal budget cuts are expected to add additional stress.Still,expectationsfor future growth broadened among most firms.2The Beige BookClevelandFourth District business activity increased slightly in recent weeks,and contacts expected activityto rise modestly in the months ahead.Manufacturers reported flat demand because of uncer-tainty,and retailers said sales were flat because of affordability concerns.Contacts said costgrowth remained robust,while their selling prices increased modestly.RichmondThe regional economy grew modestly in recent weeks.Consumer spending drove the overall growthas activity in non-consumer facing sectors of the economy were flat to down slightly.In particular,manufacturing activity was down modestly this cycle.Employment levels were largely unchanged,and wage growth remained moderate.Price growth remained moderate,overall,despite somepickup in price growth in the services sector.AtlantaThe Sixth District economy declined slightly.Employment remained steady,and wage pressuresmoderated.Prices rose moderately.Consumer spending slowed,leisure travel fell,and businesstravel was flat.Home sales rose slightly;commercial real estate weakened.Transportation andmanufacturing declined modestly.Lending at District banks increased.Energy activity rose.ChicagoEconomic activity in the Seventh District increased modestly.Consumer spending increased mod-erately;manufacturing activity increased modestly;employment and business spending increasedslightly;nonbusiness contacts saw no change in activity;and construction and real estate activitydeclined slightly.Prices rose moderately,wages rose modestly,and financial conditions loosenedslightly.Prospects for 2025 farm income were unchanged.St.LouisEconomic activity and employment levels have remained unchanged while wages and prices haveincreased at a faster pace in the recent past.Contacts continue to express a high degree ofuncertainty and concern about the impact of immigration policies on labor supply;they expectprices to accelerate over the next year due to tariffs.The outlook remains slightly pessimistic,butdeterioration has subsided.National Summary3MinneapolisDistrict economic activity contracted slightly.Employment fell as labor demand softened.Wagepressures were moderate,and prices ticked up modestly.Consumer spending fell as price sensi-tivity rose.Manufacturing also fell,with wide variation among contacts.Commercial and residen-tial construction improved slightly,and home sales rose slightly.Agricultural conditions remainedweak given poor commodity prices and despite good crop conditions.Kansas CityEconomic activity was generally flat across the District.Employment declined modestly,and wagepressures remained subdued,although growth in non-wage benefit expenses caused total laborcosts to rise.Input price growth was broad-based and contributed to moderate growth in sellingprices,declines in profit margins,and expectations of sustained price pressures.DallasEconomic activity in the Eleventh District economy rose modestly,buoyed by a pickup in non-financial services and manufacturing activity.Loan demand grew,but the housing marketremained weak.Employment was flat and staffing firms noted slow hiring activity.Price pressurespersisted,particularly in the manufacturing sector.Outlooks improved but there was widespreadtrepidation regarding shifting trade policy,high interest rates,and more restrictive immigrationpolicy.San FranciscoEconomic activity edged down slightly.Employment levels were down slightly.Wages grew some-what,and prices rose modestly.Conditions in agriculture,retail trade,and consumer and businessservices sectors eased slightly.Manufacturing activity declined modestly.Conditions in residentialand commercial real estate were largely unchanged,and lending activity was stable.4The Beige BookFederal Reserve Bank ofBostonSummary of Economic ActivityEconomic activity expanded slightly overall,with mixed results across sectors.Prices increased ata modest pace,as did wages.Consumer spending was roughly flat for retailers and restaurants,and tourism activity softened a bit.Manufacturing sales rose modestly on average,with strengthin AI-related products.Staffing services activity increased slightly,driven by demand for temporaryand administrative roles.Commercial real estate activity expanded but was still considered weak.Residential real estate activity rose at a modest pace as inventory growth helped to boost homesales.The outlook remained cautiously optimistic among manufacturing,staffing,and residentialreal estate contacts.Sentiment,however,remained pessimistic among commercial real estatecontacts and became more guarded among retail and tourism contacts.Labor MarketsEmployment was down slightly overall,and wage growth was modest.Manufacturing employmentcontracted a bit,although most manufacturers maintained steady headcounts.Restaurant employ-ment decreased modestly from a year earlier,reflecting a reduction in the number of establish-ments.Retail and hospitality headcounts were roughly unchanged.Staffing contacts describedemployment and labor demand as mostly flat from the previous quarter,aside from a modestuptick in hiring in the accounting,finance,and legal professions.According to those same con-tacts,some firms remained hesitant to make major hiring decisions,while others started to hireagain after a pause,but with a preference for temporary positions.Firms remained highly selec-tive,increasing the time to fill vacancies,while layoffs were unchanged or down slightly.Laborsupply improved on balance.For white-collar roles,job candidates became less selective inaccepting offers but maintained a preference for remote and hybrid work.Among retail and restau-rant contacts,wage pressures were more muted than in recent years.One retailer implementedmoderate merit wage increases.Manufacturers enacted modest wage increases on average,though one manufacturer postponed its annual wage increase to January 2026.One manufacturerplanned moderate increases in hiring moving forward,but otherwise no major changes in employ-ment were expected.5PricesPrices increased modestly on average.A clothing retailer marked up its prices by 10 to 15 percenton about half of its items,citing tariffs as the reason.Other retailers raised their prices onlyslightly,however,with one home furnishings seller noting that manufacturers had absorbed agreater share of tariffs than anticipated.Among restaurant contacts,menu prices increasedslightly in response to increases in wholesale food prices,fuel prices,and insurance rates,although some inputs,such as dairy products,experienced price declines from a year earlier.Hotel prices rose modestly despite decreased occupancy rates.Among manufacturers,outputprices increased modestly on average,driven in most cases by tariffs on inputs;however,priceincreases did not fully match cost increases,as firms were concerned about losing business.Atleast one manufacturer tried to mitigate the impact of tariffs by adjusting its supply chains.A fewcontacts expected further cost and price increases in the coming months,but most did not com-ment on the outlook for prices.Retail and TourismFirst District retail and restaurant sales were roughly flat in recent months,while tourism activitysoftened slightly.A Massachusetts restaurant industry contact said that sales were generally flatcompared with last year,with Cape Cod establishments reporting seasonally typical resultsdespite a rainy start to the summer.A clothing retailer experienced flat sales on average in recentmonths.A home goods retailer noted continued softness throughout the sector but experienced amoderate increase in revenues as a result of gaining market share.A discount retailer reported amodest decline in sales,which were hurt by reduced cross-border activity with Canada.Airline pas-senger traffic through Boston was flat in recent months,and,relative to 2024,there was a slightdecline in domestic passengers and an uptick in international passengers.Hotel occupancy inGreater Boston declined modestly in recent months.Several contacts perceived that the combina-tion of tariffs and historically high uncertainty threatened to dampen consumer spending movingforward.Manufacturing and Related ServicesOn average,manufacturing sales rose modestly from the previous quarter,although contactsreported results that ranged from moderate declines in sales to robust gains.The firm that experi-enced a decline in sales said that the timing of shipments was mostly to blame,as the underlyingdemand,especially for their AI-related products,remained quite strong.The contact reportingrobust growth attributed it to a rebound in demand for digital data storage products,after clientsdepleted their previously large inventories of such goods.Capital expenditures were largelyunchanged.The outlook called for modest to moderate sales growth going forward,with AI-relateddemand contributing to increased optimism for some firms.6The Beige BookStaffing ServicesStaffing services contacts reported a slight increase in activity from the previous quarter overall,although some firms described labor demand as flat.Compared with one year earlier,total place-ments increased substantially for one firm,especially for temporary roles,and demand fell slightlyat another firm for the same period.Billing rates were unchanged,while pay rates were up slightly.Some contacts noted significant increases in health insurance costs and employee onboardingcosts.Staffing firms became somewhat more optimistic for their own businesses,and one per-ceived that uncertainty was waning.One contact anticipated significant growth in the overallstaffing industry in New England in the coming year,linked to increased demand for administrative,engineering,and light industrial or manufacturing roles.Commercial Real EstateCommercial real estate activity expanded slightly,although contacts continued to view the marketas weak overall.Retail properties experienced moderate rent growth,while rents were mostlyunchanged in other sectors.Office leasing activity increased slightly further,driven by large compa-nies,but contacts emphasized that the improvements were minimal.One contact pointed out thatBostons office market,which typically tracks New Yorks in broad terms,was not experiencing aresurgence in office demand on par with that seen recently in New York.New construction was lim-ited,despite pent-up demand for multifamily housing and retail properties.Industrial leasingactivity was quite sluggish,and the overall level was down from last year.Multifamily leasing andsales were stable,but rents were flat.The outlook for commercial real estate activity remainedpessimistic on balance,although one contact became somewhat more optimistic,and anothersaid that uncertainty was waning.Contacts said that high interest rates continued to deter realestate activity and that tariffs had weakened the outlook for overall economic growth.Residential Real EstateSingle-family home sales increased moderately from a year earlier(as of June or July,dependingon the respondent),buoyed by a combination of rising inventories and healthy,stable demand.Condominium sales varied from steep declines to strong increases depending on the state butrose slightly on average.Single-family home prices increased by moderate to above-averagemargins in all New England states except Vermont,which posted moderate price declines,andConnecticut,which furnished no data.Condominium price changes varied widely across markets.Contacts reported moderate-to-large increases in home inventories,especially for condominiums.The rise in single-family inventories was reportedly driven mainly by existing homes,whereas someof the rise in condominium inventories represented new construction.Despite recent inventorygrowth,contacts described supply as still tight in relation to a balanced market.ContactsFederal Reserve Bank of Boston7remained optimistic that rising inventories would continue to support healthy sales movingforward.For more information about District economic conditions visit:https:/www.bostonfed.org/in-the-region.aspx.8The Beige BookFederal Reserve Bank ofNew YorkSummary of Economic ActivityEconomic activity in the Second District continued to decline slightly as tariff-related uncertaintycontinued to weigh on businesses.Employment in the region was mostly unchanged during thereporting period,and wage growth remained modest.Selling prices rose at a moderate pace,marking some acceleration since the previous period.Input prices continued to rise at a strongpace.Manufacturing activity picked up modestly following a prolonged slump.Activity in the ser-vice sector declined at a moderate pace.Consumer spending increased slightly.With demandremaining solid,housing markets were steady across the District.Businesses were slightly pessi-mistic about the outlook.Labor MarketsEmployment in the region was mostly unchanged during the reporting period.Firms in information,construction,and education and health reported a decline in headcounts,while personal servicesfirms as well as wholesalers reported some growth in employment.Labor supply continued to exceed demand in many industries.With heightened uncertainty,busi-nesses are still in wait-and-see mode and have been reluctant to meaningfully reduce or expandtheir workforces,and larger businesses in particular have been less willing to make commitments.An employment agency in upstate New York reported that jobs were harder to get;workers werestaying put,and attrition remained extremely low.Still,workers remained somewhat hard to find insome industries,particularly in manufacturing and healthcare,as well as construction,where adecline in immigrant labor has begun to lead to project delays.Some employers shifted to four-dayworkweeks to retain workers.There were no signs of major layoffs in the region.Wage growth held steady at a modest pace.Firms in construction and in leisure and hospitalitysaw strong growth in wages,while wage growth in finance and transportation remained moretepid.Contacts anticipated continued modest wage growth in the coming months.9PricesPricing pressures continued to rise during the reporting period,driven mostly by tariff-relatedcosts.Selling prices rose moderately,marking some acceleration since the previous period.Inputprices continued to rise at a strong pace.Multiple contacts reported a significant rise in insuranceand utility costs.So far,there has been little impact on new car prices from the tariffs due toexemptions and implementation lags,with some manufacturers absorbing increased costs.Animporter of European stainless steel used in the auto and aerospace industries reported passingon the full cost of the tariffs to customers,and a shipping company noted customers wereimporting European steel that just became more expensive with higher tariffs and no alternativedomestic suppliers.An IT provider noted that their input costs were starting to increase as theyran out of supplies purchased before tariff increases.Several businesses reported that theyplanned to hike prices to cover the higher cost of tariffed inputs.Contacts increasingly anticipateda pickup in the pace of price growth in the months ahead.Consumer SpendingConsumer spending increased slightly.Still,contacts reported that consumers were beingsqueezed by rising costs of insurance,utilities,and other expenses,limiting their discretionaryincome.Low home sales reduced household shopping for home improvement products and fur-nishings.Alcohol sales were slow during the summer.A restaurant in upstate New York notedhigher customer counts but lower average spending.Upstate New York auto dealers reported amodest sales rebound from a summer slowdown that followed a spring surge to avoid potentialtariffs.Manufacturing and DistributionManufacturing activity picked up modestly following a prolonged slump.New orders and shipmentsincreased modestly.However,uncertainty and volatility related to tariffs and trade policy continuedto weigh on firms,with many delaying decision-making and strategy-setting.One regional manufac-turer reported significant delays in receiving inputs from a U.S.supplier that was exceedingly busydue to firms shifting purchases to domestic sources.A wood products manufacturer in upstateNew York reported a sharp decline in sales to Canada,while shortages of pine logs resulted in amill stoppage,even with solid demand for pine products.Wholesale and distribution-related firmssaw slight increases in business activity.One contact noted that trucking rates remained lowerthan normal as sagging demand forced trucking companies to lower their rates.A coffee roasterreported that tariffs on Brazilian coffee and on other supplies were creating shockwaves throughthe supply chain.A wholesale firm in New Jersey noted a sharp decline in capital purchases fromlocal governments.Delivery times lengthened,and supply availability worsened slightly.Inventories10The Beige Bookdeclined.A trade contact noted that forthcoming restrictions on Chinese-built ships is expected toconstrain shipping capacity.Manufacturers anticipated modest growth in the months ahead.ServicesActivity in the service sector declined at a moderate pace.There were more significant declines inretail and in leisure and hospitality,as well as in the education and health care sectors.Tourism activity in New York City picked up slightly.Visits from overseas travelers remained slug-gish,partly due to a reduction in Canadian visitors,but domestic tourism stayed solid.In spite ofhigh hotel occupancy and record daily rates,attendance at attractions continued to lag,andBroadway ticket sales were somewhat weaker than earlier in the summer.The outlook for nextsummer is more positive,with the World Cup expected to draw large numbers of both internationaland domestic visitors to New York City.Real Estate and ConstructionHousing markets were steady and demand remained solid.Supply has been increasing slowly,butwith ongoing strong demand,prices have continued to rise in most parts of the District.Saleswere steady,with supply still a limiting factor in the New York City suburbs and upstate New York.Bidding wars pushed many sales prices above asking price.Luxury home sales remained brisk,particularly in the Hamptons,where high-end buyers,often using cash,were less affected by highmortgage rates.The New York City rental market continued to reach historic highs this summer,with momentumfrom robust demand and a bump from the recent implementation of a new law governing brokerfees on rental units.Commercial real estate markets showed ongoing improvement,despite lingering uncertainty andconcerns about potential longer-term challenges.A commercial real estate contact noted thatleasing activity in New York has surged with significant new and renewal leases,leading toreduced vacancies and stable asking rents.Major deals from prominent companies have drivenrecord high rents in Class A Midtown office space.Industrial demand remained strong in NorthernNew Jersey,with a surge in leasing for warehouse and distribution space.Building sales declinedin New York City,although there have been some positive signs in recent weeks.Constructionactivity continued to decline.Federal Reserve Bank of New York11Banking and FinanceActivity in the broad finance sector continued to pick up after a prolonged slump.Still,small-to-medium-sized banks in the District reported weakening loan demand and shrinking deposits.Banking contacts reported that credit standards had eased for all loan types,including businessloans,consumer loans,and both commercial and residential mortgages.Delinquency rates gener-ally improved since the last reporting period,but an auto industry expert noted an uptick inrepossessions.Community PerspectivesMany rural areas are underserved by healthcare professionals,including nurses,doctors,and sup-port staff,and funding constraints are likely to exacerbate existing shortages.Community leadersanticipated that upcoming changes to Medicaid may cause reductions in health care servicesmore broadly,including hospital closures,as well as a greater number of uncompensated ser-vices.Additionally,community leaders expected the new work requirements for Medicaid recipi-ents to exacerbate existing childcare shortages.For more information about District economic conditions visit:https:/www.newyorkfed.org/regional-economy.12The Beige BookFederal Reserve Bank ofPhiladelphiaSummary of Economic ActivityBusiness activity in the Third District increased modestly after declining modestly in the priorperiod.Employment levels held steady during the period,as did wage growth,which remained nearits modest pre-pandemic rate.For some entry-level positions and some workers,wage increasesare no longer keeping pace with price increasesespecially as firms adjust both workforces andprices in response to tariffs.Firms own price inflation ticked up but remained at a moderate pace,above its pre-pandemic rate.Moreover,firms reported that expectations for general inflation heldabove 4.6 percent and that expected wage inflation ticked down.Several contacts expressed con-cerns that joblessness rates and prices are rising and that wages are stagnating for lower-skilledworkers and lower-income households;in addition,rising tariffs and tighter credit standards arestraining small businesses.Expectations for economic growth over the next six months broadenedacross most sectors but were stronger among manufacturers than nonmanufacturers.Labor MarketsOn balance,employment was unchanged after falling slightly in the prior period.A modest rise inthe full-time nonmanufacturing employment index for July was offset by a comparable decline inAugust,while the part-time employment index edged down over both months.However,over thesame period,manufacturing firms reported a modest increase in employment.Also,the averageworkweek index rose among all surveyed firms.Several contacts continued to report a lack of certain skilled workers,although most contactsnoted an overall increase in job candidates,in part because of an uptick in layoffs.One nonprofitreported receiving 275 applications for an executive-level position.Meanwhile,job opportunities have fallen,in part because existing workers“are hunkering down”in their current positions and because more firms are automating.Contacts in the banking,tourism,and auto sectors all reported the continued adoption of AI technology to replace somejobs/functions.Nonprofits noted rising unemployment among their clientele.One contact reported that people areworking several part-time jobs(without benefits)to make a sufficient income if they either lose or13fail to secure a full-time job.Several private firms expressed concern that recent cuts to transitservices,including the Southeastern Pennsylvania Transportation Authority in Greater Philadelphia,will hurt employees and customers.On balance,contacts reported that wage increases steadied near(modest)pre-pandemic ratesafter running somewhat hotter in the prior period.A staffing contact reported that clients withlarger firms had slowed hiring,while some clients with smaller firms had lowered salaries forentry-level positions.However,a hotel contact reported ongoing upward wage pressure for low-skilled labor in urban markets with union contracts.On a quarterly basis,firms expectations of the one-year-ahead change in compensation cost perworker fell to a trimmed mean of 3.3 percent in the third quarter of 2025,from 3.7 percent in thesecond quarter.For comparison,wage expectations averaged 3.2 percent over the four years priorto the pandemic(20162019).PricesOn a quarterly basis,firms continued to report moderate increases in prices received for their owngoods and services over the past year.The trimmed mean for reported price changes,based onresponses from all firms to our third-quarter survey,ticked up to 2.9 percent from 2.8 percent inthe second quarter.Reported price increases averaged 2.0 percent over the prior five quarters.Several contacts noted that incomes are not keeping pace with rising prices for an increasingnumber of households.Firms reported that more than half of their customers have become moreprice sensitive since the prior quarter.One retailer reported reluctance to pass on price increasesfrom its suppliers and is finding other ways to cut costs.Nonprofits reported that higher priceshave increased the demand for basic needs,including food,shelter,and utilities.Contacts areconcerned that federal budget cuts will increase the strain on more households and will affecttheir own customers and part-time staff.Looking ahead one year,the increases that firms anticipate in the prices for their own goods rosefor the second consecutive quarter.The trimmed mean for all firms climbed to 3.3 percent in thethird quarter of 2025,from 3.1 percent in the second quarter and 2.6 percent in the first quarter.However,firms continued to expect that tariffs will drive prices higher.The trimmed mean for infla-tion expectations was 4.7 percent for all firms in the third quarter of 2025up from 3.0 percentlast year.14The Beige BookManufacturingOn balance,current manufacturing activity increased modestly after edging up slightly in the priorperiod;however,the most recent reports for August were flat.The indexes for new orders andshipments rose moderately in our July surveys,then fell in August.Manufacturers remained optimistic for growth over the next six months.Almost 60 percent of thefirms expect increases in new orders and shipments.Trade and ServicesOn balance,firms across a broad spectrum of nonmanufacturing industries reported a moderateincrease in activity,up from a moderate decline in the last period.Both the new orders and sales/revenues indexes rose modestly in July and moderately in August.Retailers(nonauto)reported a slight increase in sales over the current period,up from slightdeclines in the prior period;however,one contact noted that the uptick is partly attributable toaggressive price promotions.Auto dealers reported a slight increase in auto sales,up from slight decreases in the last period.One contact reported that pre-tariff inventory is almost sold out and that tariffs have begun tocause an increase in new car prices.However,manufacturers have increased incentives todrive sales.Activity in the tourism sector declined slightly,down from a slight increase in the last period.Lei-sure travel dipped slightly,despite discounts being offered to attract price-sensitive consumers.One contact noted that luxury travel is the only positive market segment.Expectations for growth over the next six months have broadened among nonmanufacturers sincethe prior period,but the future activity index remains below its nonrecession average.Real Estate and ConstructionExisting home sales continued to increase slightly.The inventory of for-sale properties and closedsales ticked up in June and July.New-home builders also reported a slight uptick in sales in Juneand July after recording modest declines in the prior period.One contact observed that somehomebuyers who were previously on the sidelines because of increased economic uncertainty arenow deciding to purchase.Federal Reserve Bank of Philadelphia15In nonresidential markets,leasing activity and transaction volumes recorded slight growth.Non-residential construction activity continued to record slight declines in this period,despite the con-struction of some data centers and power generation plants.Noting the recent post-pandemicsupply chain disruptions and rising prices for commodities and labor,project owners and devel-opers are making greater use of escalator clauses and larger contingency funds.Credit ConditionsThe volume of bank lending(excluding credit cards)held steady during the period(not seasonallyadjusted)weaker than the slight growth observed during the comparable period in 2024andafter falling slightly in the prior period.District banks reported modest increases in commercial real estate lending and auto loans andmoderate growth of residential mortgages and home equity lines.Growth was more robust for con-sumer lending(other than auto and credit cards),while overall loan growth was offset by a strongdecrease in commercial and industrial loans.Credit card volumes increased slightly,down frommodest increases during the same period one year ago.Banking contacts reported an uptick in activity,including deposits and loan originations.They alsonoted a slight rise in nonperforming loans.Likewise,a large service firm noted an acceleration innonpayment activity that started among low-income consumers and has now spread to otherincome tiers.Other financial contacts noted that small businesses are disproportionately affectedby tariffs and are facing new barriers to access capital.For more information about District economic conditions visit:https:/www.philadelphiafed.org/regional-economy.16The Beige BookFederal Reserve Bank ofClevelandSummary of Economic ActivityFourth District contacts reported a slight increase in overall business activity in recent weeks andexpected activity to rise modestly in the months ahead.Consumer spending was flat,with retailersnoting continued affordability concerns among consumers.Manufacturers also reported flatdemand for goods,citing trade policy uncertainty as the main driver.Demand for professional andbusiness services grew moderately,albeit at a slower pace than in the past three reportingperiods.Contacts generally reported flat employment levels and modest wage pressures.Non-labor cost pressures remained robust,and selling prices continued to grow modestly.Labor MarketsOverall,contact reports suggested flat employment levels in recent weeks.Many contacts noteddecreased demand for labor in response to flattening demand.Multiple contacts across industriesreported reducing costs by not replacing departing staff,and some manufacturers noted that theywere decreasing hours.Some retailers said they were fully staffed,with one noting that they were“not actively hiring,not actively firing.”Still,some contacts noted hiring for growth in areas ofincreased demand such as cybersecurity,and others said they were taking advantage of increasedlabor availability to acquire talent with higher skill sets.On balance,contacts noted that wage pressures grew modestly in recent weeks.However,anunusually high share of contacts,nearly 80 percent,reported holding wages steady.Across indus-tries,many contacts who noted raising wages cited a still-competitive job market.One real estateagent reported offering higher wages to attract experienced workers,and one law firm saidattracting talent“hinged largely on compensation.”Among those holding wages steady,multiplemanufacturers said they were increasing wages only during scheduled annual adjustments,whileseveral restaurateurs said they were not raising wages because of lack of profitability andincreased nonlabor costs.PricesOverall,nonlabor input costs continued to rise at a robust pace in recent weeks.Across sectors,many contacts cited tariff-related cost increases.Many manufacturers reported that tariffs had17increased the costs of electronic components,tools,metals,and other raw materials,with mul-tiple contacts noting a lack of domestic suppliers for some items.Retail contacts cited highercosts related to tariffs on vehicles,beef,and other commodities.One healthcare contact said tar-iffs had affected hospital drug pricing,pushing up the cost per unit of service.Moreover,elevatedcosts for technology such as software and AI continued to impact banking and professional andbusiness services contacts.Contacts generally expected costs to grow at a strong pace in thecoming months.On balance,contacts reported that selling prices grew modestly in recent weeks,continuing thetrend since the start of 2025.Across industries,contacts continued to report raising prices tooffset higher materials costs.Some manufacturers and auto dealers reported passing along100 percent of tariff increases to customers,while others said they were slowly raising prices inresponse to higher tariffs.Pricing power diminished for some contacts,including some metalmanufacturers,who were reducing prices to remain competitive.Several contacts in manufacturingand professional and business services reported waiting to see“how things settle”beforeincreasing prices but anticipated doing so in the near term.Consumer SpendingOn balance,contacts reported flat consumer spending in recent weeks,with several citing afford-ability concerns,especially for low-and middle-income consumers.One auto dealership believedincreased prices caused buyers to postpone purchases,while another thought customers weremaking purchases ahead of further tariff increases.Overall,contacts expected consumerspending to be unchanged in the coming months.Two auto dealers who expected sales to declinecited affordability concerns and increased strain on household budgets.Two retail store contactswho expected no change in sales cited concerns over the still-unclear impact of tariffs on con-sumer confidence and spending.ManufacturingOn balance,contacts reported little change in demand for manufactured goods in recent weeks.Many firms continued to cite uncertainty about import tariffs as a primary reason for flat or lowerorders,and a few contacts added that they or their customers were concerned about a possibleweakening of overall economic conditions.Producers that reported higher demand attributed it tocustomers seeking domestic sources of imported products or moving forward with previously post-poned purchases.By contrast,metal producers and others selling into heavy industry reported asoftening of demand.Manufacturers generally expected demand to increase modestly in thecoming months.18The Beige BookReal Estate and ConstructionOverall,residential construction and real estate contacts noted increased demand in recentweeks,though individual reports were mixed.Some homebuilders saw increased demand.How-ever,one real estate contact said higher mortgage rates were deterring current homeowners frommoving.Another said potential buyers were delaying purchases in anticipation of mortgage ratesfalling toward the end of the year.Contacts expected continued demand growth in the near term.Nonresidential construction contacts saw flat demand over the last two months.Two commercialbuilders reported decreased demand,which they attributed to tariffs and broader uncertainty,andone real estate developer saw softening demand for retail space as consumers pulled back onspending.Conversely,a few contacts reported increased demand for some industrial projectsincluding data center construction and upgrades to existing facilities.On balance,contactsexpected demand to rise slightly in the coming months.Financial ServicesOverall,bankers reported that loan demand increased modestly in recent weeks.One commercialbanker mentioned that clients had recently adjusted to changes in trade policy and moved forwardwith expansion plans.On the consumer side,one banker said clients continued to make large pur-chases ahead of anticipated tariffs,but the banker expected demand to decline in the near termas tariffs take effect.In the coming weeks,bankers expected lending activity to increase modestlyoverall,as some anticipated that clients would adapt to changes in trade policy.Nonfinancial ServicesDemand for professional and business services rose moderately in recent weeks,and contactsexpected a robust increase in demand over the coming months.Accounting firms attributedincreased demand for services to changes in tax policy.One law firm said it expects demandgrowth under two scenarios:(1)If tariffs have a modest impact and interest rates decline,it antici-pates increased demand for transactional services,and(2)If tariffs have a large impact andinterest rates do not decline,it expects increased demand for restructuring and bankruptcy ser-vices.On balance,freight and transportation contacts reported a slight decrease in demand inrecent weeks.They generally expected modest demand growth in the coming months amid theresolution of tariff-related uncertainty.Community ConditionsIn a recent survey of Ohios Federally Qualified Health Centers,which provide services to under-served populations and areas,most respondents indicated that potential Medicaid cuts would sig-Federal Reserve Bank of Cleveland19nificantly impact their budgets.Several reported that cuts would negatively affect their staffinglevels,patient access to care,and recruitment and retention of providers.Some mentioned devel-oping strategies to mitigate these effects,including increasing revenue from non-Medicaidsources.One respondent planned to shift more to value-based care,a model through which pro-viders are paid for quality of care over quantity of patients.Another mentioned that credentialingwith commercial plans allowed them to receive reimbursement from health insurance companies.Others suggested scaling back or cutting services and staff hours.For more information about District economic conditions visit:https:/www.clevelandfed.org/en/region/regional-analysis.20The Beige BookFederal Reserve Bank ofRichmondSummary of Economic ActivityThe Fifth District economy continued to grow modestly in recent weeks.Consumers continued tospend on retail and leisure travel.Additionally,new and used motor vehicle and boat salesincreased this cycle.Manufacturing activity declined modestly amid continued cost increases andsupply chain challenges due to tariffs.Activity in the remaining sectors was generally flat to downslightly.Employment was unchanged,on balance,with most firms making small changes to havethe right headcount for the current level of demand.Wage growth remained moderate.Price growthpicked up somewhat in the retail and wholesale services sector,but overall year-over-year pricegrowth remained within a moderate range.Labor MarketsEmployment levels in the Fifth District were largely unchanged in the most recent period.Multiplecontacts adjusted headcounts based on current and expected near-term changes in customerdemand.For example,a dental implant manufacturer laid off several employees in anticipation ofa slowdown in new orders.Policy changes created uncertainty for several firms,specificallyaffecting their ability to find workers or to make future hiring plans.Multiple construction contactsencountered increased difficulties finding workers due to the available immigrant labor pool,andthey were not optimistic about future labor availability.A building materials supplier moderatedtheir hiring plans due to increased economic uncertainty.Wages continued to increase moderately,as noted by a Maryland car lubrication system installer that increased wages to accommodate therising cost of living.PricesYear-over-year price growth increased slightly in recent months but,overall,growth remained mod-erate.According to our most recent surveys,manufacturers reported growth in prices receivedremaining in the low three percent range.Non-manufacturers,however,reported an increase inannual price growth that rose from a low three percent range in July to nearly four percent inAugust.Within the services sector,the firms that reported the largest increases in year-over-yearprices received generally had higher exposure to tariffs,such as wholesale and retail sellers ofmetals,wood-products,appliances,and other imported equipment and machinery.21ManufacturingManufacturing activity in the Fifth District continued to decline in the recent reporting period.Manyfirms have started to increase prices after delaying passing on increased input costs.Forexample,a compressor manufacturer raised prices after months of resistance.Uncertainty in tariffpolicy has become a significant administrative burden for multiple businesses,requiring them toallocate resources to understand and track its impacts.Manufacturers not directly affected by tar-iffs experienced secondary effects.For example,a printer manufacturer that doesnt import prod-ucts experienced increased costs ranging from 5 percent to 15 percent from suppliers who weresubject to tariffs.Additionally,a glass manufacturer reported that tariffs have forced their mainsupplier out of business and that other suppliers consolidated into fewer plants.Ports and TransportationOverall volumes at maritime ports were slightly down this cycle with the exception of auto andheavy machinery imports.Contacts attributed the decline to frontloading and high warehousinglevels,though shipping from Southeast Asia did resume during tariff delays.Agriculture exportsdecreased,which contacts attributed to retaliatory tariffs from China.Ocean freight rates trendedlower as carriers returned services and increased capacity to the East Coast.Contacts sharedthat carriers have been shuffling their vessels and service steams in response to the Chinesevessel tax,but they do not expect the tax to have much impact on volumes.Trucking demandremained flat,with contacts reporting a continuation of low volumes and low revenue.OneFifth District trucking firm acquired a company that,while still profitable,chose to sell because ofslim profit margins and persistent market malaise.Retail,Travel,and TourismConsumer spending continued to increase at a modest rate this cycle.Most retailers reportedsteady sales and foot traffic with some seeing big ticket sales go up.For example,a residentialbuilding products seller saw an increase in sales that were attributed to homeowners using sav-ings and home equity loans to fund home improvement projects.Auto,motorcycle,and boat salesall increased in recent weeks.Travel and tourism activity picked up modestly this cycle,on bal-ance.Hotel contacts reported modest growth driven by leisure travel to drive-to destinations likebeaches and mountain resorts.Sport-related travel was reportedly performing well.In contrast,business travel was down,particularly around in the greater Washington D.C.area with fewer con-ferences and training events being held in recent months.22The Beige BookReal Estate and ConstructionResidential real estate activity saw a slight decrease as expected during the summer.A NorthCarolina agent said,“it feels like we are living in two markets,those listing at the right price orthose listing like it is 2021.”Buyers continue to qualify,especially with rate incentives for newconstruction.The issue for many potential home buyers,according to a Virginia broker,is that“monthly payments arent realistic with todays rates.”A Maryland agent fears the“golden age ofrenting”will stay as it can cost more to buy versus rent.Multiple builders in the Fifth District notedtheir concerns regarding tariffs,zoning regulations,an aging workforce,and immigration policiesleading to higher construction costs.Commercial real estate activity remained unchanged,on balance.A Virgina broker noted investorsand tenants were slowly“getting off the sidelines”despite economic uncertainties.A couple ofagents noted“The Big Beautiful Bill”but were uncertain of its effects.With continued uncertainty,deals were taking longer,making them more susceptible to falling through.Brokers in Virgina,Maryland,and D.C.noted that office space was in“modern turmoil”as companies work throughreturn to office mandates.In some cases,outdated office buildings were being torn down and soldfor land value.Banking and FinanceFinancial institutions continued to report steady demand for all loan types,with a number of insti-tutions reporting a slight increase in demand for residential mortgages and auto loans.One insti-tution noted this uptick in demand was due to some softening in interest rates for these loantypes,driven by an increase in competitors within the marketplace.Commercial borrowers con-tinued to be cautious,but loan pipeline levels remained steady as well.Deposit levels continuedto be stable with a continued easing of competition within the marketplace.Loan delinquenciesremained stable among respondents with no meaningful change in the creditworthiness ofborrowers.Nonfinancial ServicesNonfinancial service providers continued to report stable demand for their services,but uncer-tainty continued to be a common thread throughout most of their comments.A digital marketingand consulting firm noted that their clients were hesitant to invest in their services until they havemore clarity around the current economic environment.A business advisory firm also reported thatthey have observed a trend of fiscal conservatism with business owners that has evolved,forcingfirms to defer investment and growth plans until the current economic picture becomes clearerand more defined.For more information about District economic conditions visit:https:/www.richmondfed.org/research/data_analysis.Federal Reserve Bank of Richmond23Federal Reserve Bank ofAtlantaSummary of Economic ActivityThe Sixth District economy declined slightly since the previous report.Labor markets remainedunchanged as most firms kept headcounts flat;wage pressures moderated further.Pricesincreased moderately.Employers job requisitions at workforce intermediaries fell,requests forfood assistance at direct service providers rose,and organizations relying on federal funding werefaced with restricted cash flow.Consumer spending softened.Leisure travel slowed,and businesstravel was flat.Home sales ticked up slightly,inventory levels moderated,and home valuesdeclined,especially in Florida.Commercial real estate activity fell slightly.Demand for transporta-tion slowed;manufacturing activity also fell.Lending increased,on net,even amid tightened stan-dards.Energy activity expanded at a modest pace.Labor MarketsSixth District labor markets remained unchanged over the reporting period.Firms maintained areluctance to hire given economic uncertainty and softening demand conditions,and some con-tinued to welcome attrition in their workforce.Most contacts shared plans to keep headcount flatfor the remainder of the year.Some businesses continued to note challenges around hiring fortechnical roles,but overall,firms reported an abundance of applicants for most positions.Con-cerns around immigration policy persisted,even though material impacts have yet to be seen inthe aggregate.Some firms paused hiring plans or were considering scaling back on plans toincrease staffing levels because of a recent pullback in federal spending.Wages were broadly unchanged over the reporting period.PricesPrices rose moderately over the reporting period.Some contacts reported recent price increaseson final products as pre-tariff inventories were depleted.Cost pass-through was more difficult forsmall businesses,forcing many to make cost-cutting decisions,including changes in product offer-ings and reduced labor hours.In construction,rising input prices for steel,aluminum,and con-crete were partially offset by stabilizing labor costs as worker availability increased amid slowingpipelines.More broadly,sourcing contracts frequently included or are expected to include tariff24clauses,adding to uncertainty about firms future expenses.Many contacts expect to realize infla-tionary impacts from tariffs through the second half of this year and into 2026,and even thosewith little or no tariff pressure anticipate increasing prices to offset other costs.Community PerspectivesSeveral workforce intermediaries reported continued signs of a weakening labor market,includingfewer job requisitions from employers,and smaller employers increasingly opting for contractlabor.Against a backdrop of constrained organizational resources,direct service providers notedincreased demand for food assistance.Community development financial institutions and smallbusiness support providers observed a rise in business owners utilizing personal and other high-interest debt to cover elevated operating costs as well as the purchase of inventory in anticipationof higher costs due to tariffs.Federal funding volatility,including delayed disbursements,cuts,andclawbacks,has resulted in restricted cash flow for organizations providing employment,food,housing,and small business supports.Consumer SpendingConsumer spending declined somewhat over the reporting period.Online and luxury retailersnoted healthy sales,while restaurants and home goods merchants saw further softening indemand as value-conscious consumers continued to trade down.Some retailers expressed con-cern over further declines in demand in the coming months,as prices may increase after pre-tariffinventories are depleted.Automobile dealers experienced an increase in demand for parts andservice as consumers chose to keep their vehicles longer.New car sales were flat to down.Demand for leisure travel declined slightly since the previous report,on net,mostly driven by apullback from price-sensitive travelers and international visitors.Hotels in some markets experi-enced lower-than-expected occupancy rates even with discounts and promotions.The pace ofbookings for group travel slowed and contract decision timelines lengthened amid heightenedrequests for concessions.Business travel remained flat over the reporting period.Travel andtourism contacts were cautiously optimistic about the fall and holiday travel season ahead.Construction and Real EstateHome sales ticked up slightly over the reporting period,owing to a slight moderation in interestrates combined with reduced market values of existing homes,as well as discounts and otherincentive offers from builders.Florida saw the most meaningful price corrections,with a sharpdrop in sales prices.Across the District,existing home inventory levels moderated as homeownersdelisted properties rather than sell at a discounted price.However,consumer credit quality andlack of affordability contributed further to slowing demand.Federal Reserve Bank of Atlanta25Commercial real estate activity declined slightly,with most sectors noting rising vacancy rates.Asbusinesses continued to escalate in-office postures,demand for“highly amenitized”office spacehelped to stabilize class A properties,while others explored converting some office buildings tohotel or industrial space.Industrial property sales were healthy,though a slight increase indemand could not stave off increasing vacancy rates,or outpace new development.Oversupply inmulti-family persisted,driving further rent concessions.Retail conditions weakened,as small busi-nesses hit hardest by inflationary pressures requested reduced rent or other assistance fromproperty owners.Retail property sales,however,were steady.TransportationTransportation contacts reported a modest decline in demand across the sector.While railroadsreported notable increases in intermodal freight,attributed to growth in market share and loweryear-earlier comparisons,industrial carloads were described as sluggish amid a recent decelera-tion in chemicals and metals shipments.Housing-related and auto shipments were also down.Container volumes at southeastern ports continued to grow,with some reporting notable year-over-year increases.Trucking firms noted softness in consumer and industrial-driven freight,though freight movements for data centers and alternative energy projects were strong for somefirms.Expectations are for a soft peak shipping season this year,as contacts sentiment wasclouded by tariff uncertainty and the potential for a slowing economy.ManufacturingManufacturing activity declined modestly over the reporting period.Housewares,beverages,andchemicals producers noted weaker orders and sales,partially attributed to ongoing uncertaintysurrounding trade policy.Demand for exports slowed,and backlogs of unfinished work declined.Some manufacturers shared strategies for shifting supply chains,such as sourcing domestically.The manufacturing outlook for the Sixth District deteriorated as contacts reported downward revi-sions to forecasts amid rising input costs,tariff uncertainty,a cautious consumer,and slowingglobal trade.Banking and FinanceLoan growth across the District increased modestly even as several bankers reported tightenedlending standards.Construction and consumer lending contracted while other portfolios sawgrowth.Capital investment slowed as firms exercised caution amid uncertainty,but credit line utili-zation increased,particularly for small businesses.Some banks noted weakness in SmallBusiness Administration lending,attributed to heightened uncertainty around federal support pro-grams.Delinquency and charge-off levels remained low by historical standards,and capital ratioswere stable.26The Beige BookEnergyEnergy activity grew at a modest pace.Liquefied natural gas production and exports remainedrobust over the reporting period.Electricity demand growth was led by the commercial and indus-trial sectors,driven largely by data center demand.Chemical manufacturers described flat to soft-ening demand,particularly for compounds used in the production of consumer paper and pulpproducts.Oil and gas contacts noted that while domestic crude oil production was stable,manyexpect production to decline by year-end.For more information about District economic conditions visit:https:/www.atlantafed.org/economy-matters/regional-economics.Federal Reserve Bank of Atlanta27Federal Reserve Bank ofChicagoSummary of Economic ActivityEconomic activity in the Seventh District increased modestly over the reporting period,and con-tacts expected a slight increase in activity over the next year.Consumer spending increased mod-erately;manufacturing activity increased modestly;employment and business spending increasedslightly;nonbusiness contacts saw no change in activity;and construction and real estate activitydeclined slightly.Prices rose moderately,wages rose modestly,and financial conditions loosenedslightly.Prospects for 2025 farm income were unchanged.Labor MarketsEmployment rose slightly over the reporting period,while contacts expected a modest pace ofgrowth over the next 12 months.Reports on current labor market conditions were mixed.Severalcontacts in manufacturing,construction,and marketing were still having trouble hiring skilledworkers.One contact reported that increased fear of immigration enforcement was reducingworker attendance in the nursing and hospitality industries.In contrast,there were also reportsacross several industries of further softening in the labor market.For example,a contact in finan-cial services was not hiring to replace workers and another in the sector noted low attrition.Someother contacts said it was easier to hire,and one from an employment placement agency reporteda decline in demand from auto and furniture manufacturers.Wages and benefits costs were upmodestly overall.PricesPrices rose moderately in July and early August,and contacts expected a similar pace of growthover the next 12 months.Nonlabor input costs rose moderately,with contacts highlighting highercosts for energy and raw materials like chemicals,aluminum,and steel.Manufacturers attributedhigher raw materials prices to tariffs and several said that they had passed on those increases tocustomers.In contrast,a roofing manufacturer had not passed on higher costs from increased tar-iffs on Chinese-made nails and fasteners.In addition,several contacts in the constructionindustry noted lower input prices in recent weeks.Overall,producer and consumer prices rosemoderately.One retail industry analyst said that while higher tariffs had pushed up costs for items28like apparel and electronics,some retailers may not start passing along tariff price increases toconsumers until the new year.Consumer SpendingConsumer spending increased moderately over the reporting period.Nonauto retail salesincreased overall,with growth in jewelry,landscaping,and computers and softening in mattressesand consumer electronics other than computers.Contacts noted that summer promotional periodswere longer than usual this year.Spending on leisure and hospitality categories rose moderately,most noticeably for hotels and restaurants.Sales of light vehicles increased moderately,boostedby elevated EV sales in advance of tax incentives phasing out.Business SpendingBusiness spending increased slightly in July and early August.Capital expenditures moved up froma low level and expectations for the coming year were for a further slight pickup in spending.Demand for truck transportation was flat and freight rates declined slightly.Manufacturing invento-ries were a little high.Retail inventories decreased from somewhat low levels,and contacts saidthat retailers had taken an even more cautious approach to orders and inventory accumulation forthe coming months.Auto inventories declined slightly.Construction and Real EstateConstruction and real estate activity decreased slightly overall.Residential construction edgeddown.There was stronger demand for home upgrades and renovations than for new single-familyconstruction.Separately,some multifamily construction had fallen behind scheduled timelines dueto permit delays and rezoning.Residential real estate demand decreased slightly,while prices andrents edged up.Contacts noted that absorption of newly finished multifamily rental propertiesslowed and that rents in the subsector had fallen.Nonresidential construction increased slightly.Building of projects that receive tax abatements or other government subsidies remained strongand demand for data centers continued to be robust.Contacts noted that contractors were morefrequently pre-ordering materials to avoid cost fluctuations.Commercial real estate demand wasunchanged.Rents increased while vacancy rates were flat.Demand was strong for new,top qualityoffice space and warehouse space.ManufacturingManufacturing activity increased modestly in July and early August.Steel production increasedslightly,with one contact highlighting greater demand from the energy sector.Demand for fabri-cated metals rose,in part due to an increase in orders from the energy and construction indus-Federal Reserve Bank of Chicago29tries.Machinery sales picked up modestly,with one contact reporting growth in orders from theaerospace and oil sectors.One heavy machinery contact noted higher-than-expected sales overthe summer but worried that some of the boost was from customers buying ahead to avoid tariffs.Auto production increased slightly,while heavy truck production was flat.Banking and FinanceFinancial conditions loosened slightly in July and early August.Bond values rose a bit,equityvalues were up modestly,and volatility edged down.Business loan demand increased slightly onnet.One contact noted an increase in mergers and acquisitions activity after several months oflittle movement and attributed the boost to investors reduced sensitivity to policy uncertainty.Incontrast,other contacts said policy uncertainty continued to make clients hesitate on taking outnew loans.Business loan quality declined slightly and rates fell modestly.Terms remained flat.Inthe consumer sector,loan demand increased slightly with one contact noting increased activity inmortgage lending.Loan quality deteriorated slightly,rates were flat,and terms tightened slightly.AgricultureDistrict farm income prospects were little changed over the reporting period as outlooks for lowercrop revenues were offset by stronger expectations for livestock earnings.Crops were in goodshape across most of the District.Corn prices fell on forecasts for record corn yields and produc-tion.Soybean prices increased after a downward revision in estimates of the number of soybeanacres planted,though there,too,forecasts were for record per acre yields.Nonetheless,contactsexpressed concern about crop disease with the potential to damage enough plants to curtail har-vests.Uncertainty over the international trade situation continued to raise concerns about soy-bean exports.Dairy prices were mixed,egg prices declined,hog prices were flat,but cattle pricesincreased to historic highs.Farm machinery sales were described as“lackluster.”Increases in fer-tilizer prices due to higher tariffs raised farmers concerns over financing costs for their 2026operations.Community ConditionsCommunity,nonprofit,and other nonbusiness contacts saw little change in activity over thereporting period and many expressed uncertainty about the state of the economy as majorchanges in federal policy continue to take effect.One state government contact saw a decline inoverall tax revenues,but an increase in sales tax revenues.Small business contacts reported thatin response to higher tariffs,owners were pivoting to find new suppliers and identifying other waysto contain costs.Leaders of nonprofit and social service organizations continued to experienceuncertainty regarding program funding pending federal appropriations decisions.In the meantime,30The Beige Bookthey were hopeful for sustained local support heading into the back-to-school season,which car-ries additional costs for low-income families.For more information about District economic conditions visit:https:/chicagofed.org/cfsec.Federal Reserve Bank of Chicago31Federal Reserve Bank ofSt.LouisSummary of Economic ActivityEconomic activity and employment levels have remained unchanged since our previous report.Wages and labor costs have increased moderately,rising at a faster pace than in previous reports.Contacts reported that immigration policies were resulting in labor shortages.Prices haveincreased moderately,but at a faster pace than in previous months;contacts expect prices toincrease at a faster pace over the next year.Contacts expressed a high degree of uncertainty andthey are concerned that tariffs will result in further cost increases.The outlook remains slightlypessimistic,but its deterioration has subsided.Labor MarketsEmployment has remained unchanged since our previous report.Most contacts reported nochange to employment levels,and employers are cautious with hiring due to uncertainty.A staffingcompany reported that businesses were not hiring until they have more clarity on federal policies.A professional services firm reported that they would like to hire another person but are waitinguntil conditions have settled.A manufacturer reported no plans to cut staff or contractors.Con-tacts in manufacturing,construction,and agriculture continue to report labor shortages and abnor-mally high turnover,which they attribute to the loss of immigrant labor.Wage growth has been moderate,but higher than in previous reports.A recreational business inMissouri reported that their average cost per hour of labor had increased 5.5 percent this year,driven by H2A labor rates and the rise in the minimum wage at the beginning of the year.A contactin agribusiness reported that wages rose 8 to 10 percent annually,yet turnover remained high.Some contacts reported that wages were higher due to normal annual pay increases,and othersattributed the rise to keeping up with higher living costs and retaining talented workers.PricesPrices have increased moderately since our previous report,but at a faster pace than in previousmonths.Contacts expect prices to increase at a faster pace over the next year,attributing thisincrease to tariffs as well as market opportunities to improve profit margins.A regional manufac-turer sourcing most of its inputs domestically reported facing an 8 to 10 percent increase in32domestic supply costs from the beginning of the year.Some contacts that absorbed their costincreases have found it unsustainable,and many reported passing some of the costs along andtesting the impact on customers.A Kentucky manufacturer sourcing roughly 70 percent of itsmaterials from Asia expressed concern about reaching a tipping point where consumers could nolonger absorb additional price increases.An auto parts distributor was concerned that consumerswould not be able to afford the rising costs.A restaurant owner in Arkansas was absorbing higherinput costs where possible but raising some prices,with sensitivity to the customer value proposi-tion.Another restaurant increased menu prices,testing their customers loyalty to their brand.Consumer SpendingConsumer spending reports were mixed.Some retailers reported stronger-than-expected sales,while others reported a decrease in sales.A kitchen supply retailer reported that sales had beenstrong and above expectations.Auto sales were also mixed.A car dealer in Missouri reported thatsales had been good because customers were buying before expected higher prices.Anotherdealer reported that sales had fallen below expectations,as prices of new vehicles were some-what unaffordable and there was a shortage of used car inventory.Leisure and hospitality con-tacts reported a decrease in their sales.A hotel franchise reported that business travel wasimproving slightly and that leisure travel,although it remained subdued,was stabilizing.Contactshave also reported consumer spending volatility,with one retailer noting that on any given day theycould be surprised by how busy they were or how few customers they had.ManufacturingManufacturing activity has been flat relative to the previous quarter and one year ago,with manycontacts reporting that sales had fallen below expectations.A manufacturer in the steel industryreported a flat first half of the year and expected the remainder of the year to be similar.A bev-erage manufacturer reported a major reduction in their exports due to retaliation against US tar-iffs;however,increased demand for other products was balancing their portfolio at some facilities.A food processing manufacturer reported that production volumes had decreased about 4 percentand that further declines were anticipated.A Kentucky manufacturer that had been in a holdingpattern for any new capital spending projects since the beginning of the year was moving forwardwith acquisitions of distressed companies.Nonfinancial ServicesActivity in the nonfinancial services sector has been generally unchanged since our previousreport.Transportation businesses reported slightly lower activity.A health care business reportedmixed activity across their services.An auto repair firm reported that business had exceededexpectations year-to-date due to work on older-model vehicles that were being kept instead ofFederal Reserve Bank of St.Louis33traded in.Staffing companies reported lower demand for their services as companies were cuttingback on costs where possible and that hiring activity was down.Professional services businessesreported that fewer construction projects were resulting in lower demand for their services,butthey were expecting conditions to improve.Real Estate and ConstructionResidential real estate activity has remained unchanged since our previous report.While activelistings and sales have increased slightly relative to a year ago,real estate agents across theDistrict described the residential market as slow and expect this to continue for the remainder of2025.A home builder in Missouri reported that newly constructed homes were lingering on themarket longer and discounts were being offered to move this inventory.Additionally,contacts haveshared that high-end properties were sitting on the market longer.Commercial real estate activity has remained unchanged since our previous report.Contactsreported continuing progress on existing projects but no new business taking place.Developerscited economic uncertainty,high borrowing rates,and higher construction costs as factors.On thebright side,a development group in Tennessee reported that retail demand for space remainedstrong after a pause in the spring.Banking and FinanceBanking activity has remained unchanged since our previous report;however,loan demand hasbeen slightly better than previous-quarter expectations.A banker in Tennessee reported that loangrowth continued to be moderate and forecasted the remainder of 2025 to be moderate.Creditconditions remain strong,although delinquency rates have slightly increased and bankers expect acontinued rise into the next quarter.For example,a banker in Kentucky reported that credit qualityin the consumer and commercial lines of business continued to be stable,apart from some con-sumer accounts that are attributable to CRA-related exposure.Overall,bankers noted that theywould continue to be cautious:They were selective in their lending as consumer credit risk wasbuilding and as CRE loan pipelines were slowing.Agriculture and Natural ResourcesAgriculture conditions have remained strained but stable.One contact reported that,while theywere appreciative of additional government support,farming remained a very difficult business asall the major row crop prices were below farmers break-even production costs.A farmer inWestern Kentucky shared that,while soybean production was strong,they were prepared to storetheir production instead of selling it as usual,reflecting a weak market demand relative to produc-tion.A large farm equipment dealer reported that defaults on payment for equipment were34The Beige Bookincreasing,and more farms were likely to fail this year.Nevertheless,most contacts do not expecta significant drop in land values.Cattle farming contacts reported strong profits but were notexpanding due to the high cost of expansion and longer-term uncertainty.Visit our Regional Economic Data and Reports page for more information about District economicconditions.Federal Reserve Bank of St.Louis35Federal Reserve Bank ofMinneapolisSummary of Economic ActivityEconomic activity in the Ninth District was down slightly since the previous report.Employmentwas down slightly,and labor demand continued to soften.Price pressures increased modestly,andwage growth was moderate but easing.Consumer spending also softened.Construction was flat,while real estate markets were mostly flat.Manufacturing contracted slightly and agricultural con-ditions remained weak.Activity among minority-and women-owned business enterprises declined.Labor MarketsEmployment was down slightly since the last report.Surveys showed hiring sentiment and jobopenings continued to soften,and a slightly larger share of firms reported shrinking head countscompared with those seeing growth.Some firms were choosing not to fill turnover or other openpositions given economic uncertainty.A construction subcontractor in Minnesota said thatapproved projects were being delayed due to the uncertainty,and“we are struggling to keep ourpeople busy.”Recent layoffs remained low,however,and unemployment insurance claims fellslightly.Those firms that were hiring generally found improved labor availability.A Wisconsin manu-facturer of personal care products said it was“getting people applying that are over-skilled”foropen positions.A North Dakota manufacturer experiencing growth said it was“able to replaceattrition more readily,”with most job candidates already employed elsewhere.A staffing firm sawdemand for industrial workers increase for two consecutive months.A contact there said theywere uncertain whether this was a sign of growing demand or employers increased reluctance tohire directly.Wage growth was modest to moderate and easing overall,according to recent surveys.Severalcontacts reported that recent trade union contracts saw significant wage gains.However,a profes-sional services firm in MinneapolisSt.Paul said slow sales meant“the team will not receive anybonuses this year.”A North Dakota bakery reported using turnover to keep wages flat by loweringrates for new hires to“balance out any wage increases to longer-term staff.”36PricesPrice increases over the reporting period were modest,about the same pace of increase as thelast report.One-quarter of District firms increased the prices they charged to customers in Julyfrom a month earlier,according to a monthly survey,and roughly the same percentage anticipatedincreasing their prices in the month ahead.About half of respondents reported increased inputprices over the previous month.A manufacturer of home furnishings reported increased pressureto lower prices due to competition in the sector,even though input costs have increased.Othercontacts said margins were already thin and their ability to absorb cost increases was limited.Aretail contact reported numerous notifications from suppliers indicating price increases werecoming.Retail fuel prices decreased slightly since the last report.Worker ExperienceWorkforce development professionals reported worsening conditions for people looking for jobs assoftware engineers,media and creative services professionals,managers,and business andfinance professionals.Job seekers looking for employment in more physically demanding jobs likecooks,servers,landscapers,and hairstylists were still able to get jobs with relative ease,butoverall,opportunities were contracting.Some contacts noted increasing impacts from artificialintelligence(AI)in the regions labor market.While they referred to resume screening and AI inter-viewing tools as“barriers to employment,”they also acknowledged that job seekers who used AIto refine their resumes and do mock interviews were enhancing their confidence and streamliningtheir job search experience.Consumer SpendingConsumer spending was slightly lower since the last report.Retail contacts overall reported slowersales and foot traffic.A Montana brewery contact said,“July is our busiest month of the year.Butit is still slow compared to previous years.”Contacts reported increased price sensitivity.A homedcor retailer in northern Wisconsin said that“right now,if we dont provide sales discounts topeople they will not even bother to come in.”International travel,especially from Canada,remained subdued,dampening sales for some businesses,particularly in regions nearer theborder.Visitors to most national parks in the District were modestly lower in July year over year.Hotel occupancy rates were also lower in the Dakotas and Montana compared with last year,buthigher in Minnesota and Wisconsin;average revenue per room was similarly mixed.A large vehicledealer in the District experienced flat sales overall in July;new-vehicle sales were strong whilesales of used vehicles fell.Federal Reserve Bank of Minneapolis37Construction and Real EstateConstruction activity was flat since the last period.A recent survey revealed that interest rates,high material costs,and government policies were the top three challenges for construction firms.Most respondents were hiring but it remained difficult to find skilled workers.Employment in thesector was expected to grow modestly on balance over the coming months.The year-over-yearvalue of permitting activity for new construction grew modestly,driven by stronger gains in residen-tial permits.Permitting activity was strongest in Rochester,Minnesota;Rapid City,South Dakota;and Billings,Montana.Commercial real estate was flat overall.High financing rates and economic uncertainty continuedto dampen new development in retail,multifamily,and industrial space,benefiting existing prop-erty owners.Residential real estate was slightly higher overall,but with some variability.Homesales in July rose across Montana and northern Wisconsin compared with last year,but were flatin Fargo,North Dakota,and Sioux Falls,South Dakota.Sales fell modestly in western Wisconsinand MinneapolisSt.Paul,but rose across the rest of Minnesota.ManufacturingDistrict manufacturing activity contracted slightly since the previous report.Reports amongmanufacturing contacts were somewhat mixed,as slightly more contacts reported decreasedorders than increased orders,but relatively few reported steady business activity.An index ofregional manufacturing conditions indicated activity decreased in Minnesota and South Dakota inJuly from the previous month,while activity in North Dakota increased.An equipment producernoted,“Our actual dollar sales volume is only down slightly from last year,but this is mostly dueto the increased prices we are forced to charge;the actual volume of equipment made is downquite a bit.”Agriculture Energy and Natural ResourcesDistrict agricultural conditions remained weak.Preliminary estimates indicated strong expectationsfor crop yields and production in much of the District,given favorable weather and ample rainfall.However,crop prices were at or below break-even for many producers.An industry contact reportedthat the threat of tariffs was having a major impact on fertilizer prices.Oil and gas explorationactivity was steady since the previous report,while production increased slightly.Minority-and Women-Owned Business EnterprisesActivity among minority-and women-owned business enterprises(MWBEs)declined,and contactsexpected further deceleration in the upcoming weeks.While activity slowed for the majority of con-38The Beige Booktacts,some experienced higher demand for their services.The owner of an auto repair shop inSouth Dakota noted that customers were“spending more on maintenance items than last year atthis time,”adding that people seemed to be“planning to drive their used vehicles longer.”Bothemployment and labor demand trended down among MWBEs.Upward pressure on compensationand input prices continued.For more information about District economic conditions visit:https:/www.minneapolisfed.org/region-and-community.Federal Reserve Bank of Minneapolis39Federal Reserve Bank ofKansas CitySummary of Economic ActivityEconomic activity was generally flat across most sectors of the Tenth District economy.Employ-ment levels fell modestly,and wage pressures remained subdued on softer hiring conditions.Totallabor costs were still expected to rise as costs for non-wage benefits rose faster than wages.Prices grew moderately,with many businesses citing cost pressures coming from tariffs.Severalcontacts suggested input cost growth was more broad-based than the incidence of tariffs,citingboth the rise in prices on non-tariffed items and the unwillingness of suppliers to reduce pricesafter applicable tariff rates were reduced over the summer.Higher input costs broadly led to com-pression in profit margins,which some bankers reported had a mild effect on credit quality.How-ever,bankers indicated higher tariff rates and declining profit margins have not adversely affectedtheir willingness to lend as overall loan quality remained sound.Consumer spending was steadybut reportedly more oriented towards low-cost goods and services.Labor MarketsEmployment levels contracted modestly in the District,driven by declines in both services andmanufacturing employment over the past month.Businesses anticipated slightly weaker hiringactivity in coming quarters.Wages grew at a modest pace,and businesses expected similarly sub-dued wage pressures throughout the remainder of the year.However,contacts noted the costs fornon-wage benefits will continue to increase faster than wages in the near term,adding to overalllabor costs.Contacts in higher education reported strong enrollments for the fall term.Job place-ments for recent graduates were decidedly mixed across the Districtmost contacts reported aweaker job market for recent college graduates,including those graduating in STEM fields.How-ever,some universities and many community colleges reported strong placements and startingsalaries for their recent graduates.PricesPrices continued to grow moderately over the past month,with input prices outpacing growth inprices for finished goods and in retail.Several business contacts reported broad-based input priceincreases associated with,if not driven directly by,tariffs;several contacts suggested suppliersopportunistically raised prices beyond what is due to tariffs alone.Furthermore,contacts indicatedtheir suppliers were reluctant to lower prices even when tariff rates fell,resulting in some sticki-40ness in input costs.Overall expectations were for a moderate increase in both input and outputprices in the coming quarters.Consumer SpendingConsumer spending over the last several weeks was flat on average,though businesses reportednotable shifts in consumers purchasing behavior.The clearest changes were in discretionaryspending,where households were trading down to lower-cost alternatives.These adjustmentsreportedly reflected a combination of financial strain among lower-income households and cau-tious sentiment tied to expectations for the remainder of the year.Firms shared that householdsare not necessarily reducing overall consumption but reallocating it toward more affordable or“inferior”goods and services.Anecdotal reports include families opting for staycations in place ofextended travel and some households returning vehicles within a year to avoid the burden of loanpayments.As one pharmacy shared,shoppers are buying less retail merchandise but maintainingconsumption for the more essential items.Firms anticipate this pattern to persist,with con-sumers prioritizing cost over quality.Community ConditionsThe housing market for lower-income homebuyers remains tight overall,but contacts reportedslight softening in recent months.Home prices in the relatively lower range increased only slightly,but contacts said that interest rates,insurance costs,and property taxes remained barriers tonew purchasing activity.Some reports of more low-income homeowners selling their housesemerged as escrow payments rose,but the more common trend was for lower-income buyers toavoid moving to keep their low-rate mortgage if they had one.As a result,inventories of lowerpriced homes have not risen as much as they have at higher price ranges.Contacts in most localmarkets reported continued competition with investor purchasers for lower-priced homes.However,rising availability of rental units and softening rent growth reportedly offset some of the price pres-sures associated with the additional institutional buyers active in local markets.Manufacturing and Other Business ActivityManufacturing and consumer service activities grew slightly,which was a shift from volatile reportsof growth and declines during the first half of the year.Contacts generally expected the recentpick-up in activity to gain momentum,as expectations for growth over the next six months rosemoderately.However,many contacts in professional service sectors across the District reporteddeclining sales,weaker expectations,and lower employee headcounts.Contacts noted that down-stream customers are reticent to commit to new service contracts as they try to protect free cashflow and profit margins.The majority of businesses indicated profit margins contracted in recentmonths.Declines in profit margins were reportedly broad-based across sectors but were most pro-Federal Reserve Bank of Kansas City41nounced in heavy manufacturing sectors where tariffs exerted the greatest cost pressures.Looking ahead,contacts at heavy manufacturing businesses were relatively more pessimisticabout the outlook for profitability over the next six months.Real Estate and ConstructionCommercial real estate(CRE)activities showed little-to-no change in recent months.Contactsnoted nearly all aspects of CRE activityincluding prices,sales,absorptions,access to credit,and new developmentdid not change meaningfully.The recent stabilization of activity is aroundlevels that are in line with historical norms.However,commercial real estate developers noted thecosts of contractors and subcontractors were beginning to rise due to a combination of limitedavailability of crews in certain markets and rising building materials prices across most markets.Community and Regional BankingLoan demand and credit standards were mostly unchanged across categories over the last month.Overall loan quality remained sound for District banks,though modest deterioration was noted andwas broad-based across lending categories.The outlook for loan quality by most respondents,including the expected impact of tariffs,was unchanged for the next six months.However,somerespondents expect tariffs to cause mild deterioration in credit quality due to higher input costsaffecting businesses margins and leading to higher costs for consumers.During the same timeframe,respondents indicated tariffs are not projected to affect their willingness to lend.Depositlevels remained stable,though competition on rates persists.EnergyTenth District oil and gas activity rebounded,growing slightly over the last month.Rig counts inOklahoma and Colorado increased slightly despite oil prices falling near firms reportedbreakevens and natural gas prices remaining unprofitable.Exploration and production companiesmaintained steady oil and gas production levels so far this year.Contacts cited data center elec-tricity demand and liquified natural gas exports as key natural gas demand drivers.However,theyalso mentioned OPEC production increases and falling European power demand as risks to theiroutlook.Drillers noted that contract pricing with oilfield service providers stayed flat,despitefalling oil prices,due to increased equipment replacement costs from tariffs.AgricultureAgricultural economic conditions in the Tenth District worsened slightly during early August.Profitopportunities for crop producers remained weak,and corn prices declined moderately over thepast month alongside expectations of record U.S.production.The majority of crops were in good42The Beige Bookor excellent condition and could support strong production levels,but low prices could limit rev-enues.Conditions in the crop sector weighed on the farm economy,but an increase in cattleprices during recent weeks further strengthened income prospects for some producers.Contactsthroughout the District continued to cite low crop prices and elevated expenses as key factorsweighing heavily on the outlook for farm financial conditions.For more information about District economic conditions visit:https:/www.KansasCityFed.org/research/regional-research.Federal Reserve Bank of Kansas City43Federal Reserve Bank ofDallasSummary of Economic ActivityEconomic activity in the Eleventh District expanded modestly.Growth picked up in nonfinancial ser-vices and manufacturing.Retail sales increased,and loan volume rose,driven by increases inresidential and commercial real estate lending.Agricultural conditions were favorable.Meanwhile,housing market activity remained weak,and drilling activity and oil production were flat.Employ-ment levels were unchanged,and wage growth was moderate.Prices increased modestly apartfrom the manufacturing sector,where price pressures intensified due to tariffs.Outlooks improvedbut there was widespread trepidation regarding shifting trade policy,high interest rates,and morerestrictive immigration policy.Just over one-fifth of firms said they expect a decline in demand fortheir goods or services over the next six months.Labor MarketsEmployment was fairly flat over the reporting period.A roughly equal share of service firmsreported increasing versus decreasing employment.Staffing firms reported slow hiring activity,with a couple of contacts noting that companies were opting to reallocate workload internally orcutting staff in response to cost pressures from tariffs.A restaurant chain cited plans to automatein some areas to reduce labor costs.Homebuilders,oilfield services firms,and nonprofits notedtrimming headcounts.Meanwhile,overall manufacturing employment grew moderately,althoughsome transportation equipment and petrochemical manufacturers reported reducing staff to con-tain costs.Overall,wage growth was moderate,and firms noted improved availability ofapplicants.PricesSelling prices increased at a modest pace,except for the manufacturing sector where price pres-sures rose reflecting the widespread impact of tariffs.According to an August Dallas Fed survey,nearly half of firms noted being negatively impacted by tariffs,and all of them noted facing higherinput costs as a result.Among those passing through tariff cost increases to customers in theform of higher prices,roughly half noted doing so within a month of the tariff taking effect,andthree quarters are doing so within three months.Reports on the extent of pass through weremixed,with only 21 percent noting full pass through thus far.Companies reported mitigating tariff44impacts by building up inventories prior to the tariff,absorbing higher costs,and finding alternativesuppliers.ManufacturingActivity in the manufacturing sector rebounded,following weakness in the prior reporting period.New orders rose for the first time since January,led by increases in durable goods,namely trans-portation equipment,machinery,and construction-related products.Output for nondurable goodsexpanded as well,with strength noted in food and printing-related manufacturing.Gulf Coast refin-eries cited steady production levels and higher margins for refined products.Perceptions ofbroader business conditions stabilized,and manufacturing outlooks improved slightly,thoughthere was continued widespread apprehension regarding tariffs,high interest rates,and immigra-tion policy.Retail SalesRetail sales rose during the reporting period.Auto sales remained steady,but one auto dealernoted a reduction in demand for repair services.Building material and garden equipment retailerscited lower sales,while health care and food and beverage stores reported increased activity.Overall retail inventories continued to decline,and outlooks stabilized though uncertainty per-sisted,and various contacts cited concern about the impact of tariffs on prices or demand.Nonfinancial ServicesActivity in nonfinancial services grew modestly during the reporting period.Growth was driven inpart by revenue increases in health care and administrative and support services.Staffing firmssaw a slight increase in demand for their services,with one contact noting that clients wereholding off on hiring due to uncertainty.Meanwhile,transportation and warehousing servicesactivity was flat.Airlines reported a modest pickup in demand in July,though activity remainedbelow last years levels.Service sector outlooks improved,but uncertainty remained a headwind.Construction and Real EstateHousing market activity remained weak.Foot traffic and sales were choppy and lackluster,withone contact characterizing the market as dismal.Existing and new home inventories rose further,and builders were increasingly relying on marketing and incentives,including discounting and mort-gage rate buydowns,to close deals.Home starts have slowed,and lot supply is rising.Outlookswere pessimistic amid weak demand and elevated economic uncertainty.Federal Reserve Bank of Dallas45Commercial real estate activity increased slightly during the reporting period.Apartment demandremained solid and occupancy rates edged higher,but the influx of new units kept rents flat todown.Office leasing ticked up,and contacts said there appear to be more signs of stability.Indus-trial activity was characterized as solid.New commercial construction activity was subdued.Invest-ment sales activity continued to be limited,with scattered reports of distressed property sales.Outlooks remained cautious.Financial ServicesLoan volume and demand rose in Au
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CHINAS ECONOMIC SLOWDOWNAND ITS IMPACT ON TRADING PARTNERS Edited by Arthur R.Kroeber and Jonathon MarekNBR Board of AdvisorsWilliam Abnett NBRSe Hyun Ahn University of SeoulDennis C.Blair Admiral,U.S.Navy(ret.)Ketty Chen Taiwan Foundation for DemocracyChun In-Bum Lt.General,ROK Army(ret.)Josh Corless ConocoPhillipsLinda Distlerath PhRMA(ret.)Nelson Dong Dorsey&Whitney LLP(ret.)Nicholas Eberstadt American Enterprise InstituteKarl Eikenberry Former Ambassador(U.S.);Lt.General,U.S.Army(ret.)Bates Gill NBRStephen Hanson College of William and MaryHarry Harding University of Virginia(ret.)Mikkal Herberg University of California San DiegoCarla A.Hills Hills&CompanyRobert Holleyman Office of the U.S.Trade Representative(ret.)Mark Jones Kingswood Capital SolutionsAmit Kapoor India Council on CompetitivenessTariq Karim Former Ambassador(Bangladesh);Independent UniversityHeino Klinck U.S.Army/Department of Defense(ret.)David Lampton Johns Hopkins University Stephen Lanza Lt.General,U.S.Army(ret.)Nicholas Lardy Peterson Institute for International EconomicsRichard Lawless New Magellan VenturesWilliam McCahill Department of State(ret.)Dewardric L.McNeal Longview GlobalMeredith Miller NBRTami Overby Albright Stonebridge GroupJohn S.Park Harvard Kennedy SchoolPamela Passman APCO WorldwideRajeswari Rajagopalan Australian Strategic Policy InstituteEvans Revere Department of State(ret.)Clarine Nardi Riddle Kasowitz Benson Torres LLPRyo Sahashi University of TokyoUlrike Schaede University of California San DiegoRobert Scher BP(ret.);Department of Defense(ret.)David Shambaugh George Washington UniversityBenjamin Shobert OptumMike Studeman Rear Admiral,U.S.Navy(ret.)Travis Sullivan Boeing CompanyAlison Szalwinski The Asia GroupTravis Tanner Greenpoint GroupArzan Tarapore Stanford UniversityJessica Teets Middlebury CollegeDebra Waggoner Corning(ret.)Dana White Juno CollectiveNBR Chairs and CounselorsRichard J.Ellings NBR(ret.)Thomas B.Fargo Admiral,U.S.Navy(ret.)Aaron L.Friedberg Princeton UniversityCharlene Barshefsky U.S.Trade Representative(ret.)Charles W.Boustany Jr.U.S.House of Representatives(ret.)Norman D.Dicks U.S.House of Representatives(ret.)Roy Kamphausen NBR(Special Advisor)Ashley J.Tellis Carnegie Endowment for International PeaceNBR Board of DirectorsJohn V.Rindlaub(Chair)Regional President(ret.)Wells Fargo Asia Pacific Ahn Ho-young Former Ambassador(South Korea)Richard J.Ellings President Emeritus and Counselor NBR(ret.)Jonathan W.Greenert Admiral,U.S.Navy(ret.)Charles Hooper Senior Counselor The Cohen GroupQuentin W.Kuhrau(Treasurer)Chief Executive Officer Unico Properties LLCMelody Meyer President Melody Meyer Energy LLCHuan Nguyen Rear Admiral(ret.),U.S.Navy;Senior Advisor to Naval Sea Systems CommandLong Nguyen Chairman,President,and CEO Pragmatics,Inc.Jonathan Roberts Founder and Partner Ignition PartnersTom Robertson Corporate Vice President and Deputy General Counsel MicrosoftCynthia A.Watson Professor and Dean Emerita National War CollegeMichael Wills President NBRHonorary DirectorGeorge F.Russell Jr.Chairman Emeritus Russell Investmentsthe national bureau of asian researchnbr special report#118|june 2025chinas economic slowdownand Its Impact on Trading PartnersEdited byArthur R.Kroeber and Jonathon Marekthe national bureau of asian researchThe NBR Special Report provides access to current research on special topics conducted by the worlds leading experts in Asian affairs.The views expressed in these reports are those of the authors and do not necessarily reflect the views of other NBR research associates or institutions that support NBR.The National Bureau of Asian Research helps decision-makers better understand Asia and craft concrete,actionable policy.NBR is an independent research institution based in Seattle and Washington,D.C.We bring world-class scholarship to bear on the evolving strategic environment in Asia through original,policy-relevant research,and we invest in our future by training the next generation of Asia specialists.Our research is conducted by a global network of specialists and tackles critical issues identified by stakeholders in anticipation of future challenges.The findings are a result of independent scholarship and do not reflect institutional perspectives.Our rigorous standards facilitate informed decision-making based on knowledge rather than ideology.Established in 1989,NBR is a legacy organization of Senator Henry M.Jackson,who foresaw the national need for an institution to study and inform public policy on Asia in both the public and private sectors.Building on Senator Jacksons bipartisan approach,NBR engages policymakers looking for reliable Asia expertise through sustained interaction in high-trust,nonpartisan settings.Our experts and research have shaped congressional legislation and administration policies,brought issues to the top of the U.S.foreign policy agenda,and attracted worldwide media attention.We mobilize expertise on Asia for a more effective foreign policy.NBR receives support from foundations,corporations,government(including foreign governments of allies and liberal democracies),and public agencies,and philanthropic individuals.NBR reserves the right to publish findings.We do not undertake classified or proprietary research work,and we observe policies to avoid conflicts of interest.To download issues of the NBR Special Report,please visit the NBR website http:/www.nbr.org.This report may be reproduced for personal use.Otherwise,the NBR Special Report may not be reproduced in full without the written permission of NBR.When information from NBR publications is cited or quoted,please cite the author and The National Bureau of Asian Research.This is the one-hundred-and-eighteenth NBR Special Report.NBR is a tax-exempt,nonprofit corporation under I.R.C.Sec.501(c)(3),qualified to receive tax-exempt contributions.2025 by The National Bureau of Asian Research.Cover design and illustration by Nate Christenson.For further information about NBR,contact:The National Bureau of Asian Research One Union Square 600 University Street,Suite 1012 Seattle,Washington 98101206-632-7370 Phone nbrnbr.org E-mail http:/www.nbr.orgchinas economic slowdownand Its Impact on Trading PartnersTABLE OF CONTENTS v ForewordJonathon Marek 1 Chinas Slowing Economic Growth:Causes and ImpactsArthur R.Kroeber 23 Chinas International Economic Narratives in an Age of Slowing GrowthDavid Gitter 45 The Trajectory and Implications of Chinas Economic SlowdownArthur R.Kroeber,Ana Horigoshi,and Rodney Knight 57 What Chinas Economic Slowdown Means for Key Countries:Case Studies59 Brazil Ana Horigoshi and Jonathan Solis70 Germany Ana Horigoshi and Rodney Knight80 Indonesia Bryan Burgess and Ana Horigoshi91 Nigeria Ana Horigoshi and Rodney Knight100 Paraguay Ana Horigoshi and Jonathan Solisnbr special report#118|june 2025FOREWORD MAREKvFOREWORDOver the four decades from the beginning of reform and opening in 1978 to the last year before the Covid-19 pandemic in 2019,the economy of the Peoples Republic of China(PRC)was defined by rapid expansion.GDP growth exceeded 10%in fifteen of those years and only dropped below 5%twice.Neither global economic events,such as the 1997 Asian financial crisis and the 2008 global recession,nor domestic political or policy shifts seemed capable of knocking the PRC economy off its trajectory.This growth pattern,and in particular an infrastructure-and investment-driven growth model designed to fuel a boom in manufacturing exports,fundamentally reshaped the global economy and upended supply chains as companies around the world relocated manufacturing operations to the PRC.This came to be known as the“China shock.”While the scale of the impact was massive globally,its particular manifestations varied based on the nature of each countrys economic relationship with the PRC.For commodity exporters like Brazil and Indonesia,rapid growth in Chinese demand led to higher prices and windfall profits.For manufacturing sectors across the industrialized world,however,competition from Chinese firmswhich often gained an advantage through expansive state subsidies,questionable labor practices,and intellectual property theftmade the China shock a uniquely disruptive experience.For many developing countries,the rate of growth suggested that the so-called China model might be an example worth following,with closer political and economic alignment with the PRC providing not only access to investment or development finance but also a set of economic policies to emulate.Over the past several years,however,a new China shock is manifestingan epochal development that will similarly reshape how the PRCs economic interlocutors engage with the country.Like the first China shock,the fundamental cause of the shift can be found in the rate and pattern of Chinese economic growth.Unlike the first shock,however,this one is the result of meaningfully slower growth.A 5%growth rate,which had been the bare minimum one could have expected for 40 years,now represents an ambitious target for the countrys leadership.The imperative to understand the causes of this economic slowdown,analyze its trajectory,and examine its implications for Chinas trade and investment partners around the world is the motivating factor behind this study.The first chapter analyzes the numerous factors driving this slowdown.Some are immutable:the natural tendency of growth to slow as a country develops and matures economically,the decline of growth engines such as infrastructure and housing,and a deteriorating demographic situation.Others,however,are driven by a pattern of government policy decisions over the past decaderanging from short-term macroeconomic management to longer-term strategic choicesthat have undermined or deprioritized economic growth.Of course,Chinas economy is not collapsing.However,given its scale,the rate of its slowdown,and the changes in its growth model,previous approaches to economic engagement with the PRC,many of which are characterized by disproportionate levels of reliance on the country as a market or source of supply,are no longer viable.Despite PRC efforts to advance a misleading set of narratives regarding the value of economic engagement,as discussed in the second chapter,the data presented in this report tells a different story.Recognizing the immense implications of this viNBR SPECIAL REPORT JUNE 2025reality for countries and companies that have aligned their economic strategies with a Chinese economic trajectory that no longer exists,this report ultimately seeks to understand the impacts of Chinas slowdown on countries that engage with the PRC through trade,investment,and other economic channels and to provide guidance for these actors on how to restructure their engagement to align with the new reality.Our analysis proceeds both quantitatively and qualitatively,seeking first to map out the likely path of the PRCs slowing economya topic covered in both chapters 1 and 3and then to examine the specific channels through which this slowdown will affect other countries.That examination proceeds from both the top down,through identifying a series of high-level impacts that will be felt by various types of economies,and from the bottom up,through conducting five country-specific case studies that provide tangible evidence of cross-country trends and assess the implications for countries seeking to re-evaluate their models of economic engagement with China.The countries selected as case studiesBrazil,Germany,Indonesia,Nigeria,and Paraguayare intended to be diverse and representative of a variety of different approaches to trade and investment relations with China.This ensures that the reports analysis and policy implications are useful for not only the five countries but also the dozens of others that are similarly situated.This project would not have been possible without the diligent efforts of the project team under the guidance of Principal Investigator Arthur Kroeber,whose knowledge of the PRC economy knows no bounds.AidData,in particular through the contributions of Ana Horigoshi and Rodney Knight,has been a perfect partner,providing a robust empirical foundation and unparalleled analytical rigor to strengthen the projects conclusions.The regional expertise of Ana and Rod,as well as Bryan Burgess and Jonathan Solis,was similarly instrumental to the projects case studies.NBR Nonresident Fellow David Gitter eagerly and deftly undertook the monumental task of condensing the entire apparatus of PRC propagandizing and narrative-crafting around its economy and international economic engagement into a single,cohesive chapter.And finally,I am immensely grateful to the rest of the NBR teamDoug Strub and Alison Szalwinski for their leadership and vision,Fern Hinrix for her research support,and Josh Ziemkowski for his editorial expertise.Jonathon MarekSenior Project Manager for Technology and Geoeconomic Affairs,NBR1the national bureau of asian researchnbr special report#118|june 2025ARTHUR R.KROEBER is Partner and Head of Research at Gavekal Dragonomics and an Adjunct Professor of Economics at the NYU Stern School of Business.He can be reached at.Chinas Slowing Economic Growth:Causes and ImpactsArthur R.KroeberEXECUTIVE SUMMARYThis chapter analyzes Chinas economic slowdown and considers the implications of the countrys growth trajectory for its trade and investment partners.MAIN ARGUMENTOver the past decade,China has seen a steady decline in its real GDP growth rate.This rate has declined from an average of 10%in 19802012 to around 7%in the seven years preceding the Covid-19 pandemic(201319)and to less than 5%in the years since China exited the pandemic.Many independent forecasts suggest that the Chinese economy will continue to slow in the coming years.The International Monetary Fund,for instance,projects that the countrys real growth rate could slow to around 3%by 2030.Chinas economic slowdown results from a mix of structural factors(such as demographics and the exhaustion of returns from infrastructure spending)and policy choices related to both long-term development strategy and short-term macroeconomic management.Under current policy conditions,China will probably record 4%5%real GDP growth in 202526,falling to 3%4%thereafter.There is little chance of macro policy becoming dramatically more stimulative.Deflationary pressure will likely persist,resulting from both the impact of the property sector collapse and the governments policies of increasing the supply of manufactured goods while doing little to support aggregate demand.As a result,nominal growth will not be much stronger than real growth.POLICY IMPLICATIONS Sluggish growth will not prevent Chinas manufacturing sector from thriving,particularly given the governments industrial policies and the countrys rising share in global export markets.Protectionist efforts to reduce the flow of Chinese exports in global markets will struggle to reverse this trend.China could achieve much stronger growth results with a more stimulative policy mix,including greater support for the property sector;interest rate cuts and currency depreciation;more fiscal spending to boost aggregate demand;and service-sector deregulation.Chinas investment and trade partners will need to contend with an economy whose demand for imports is sluggish and increasingly skewed away from manufactures toward commodities and other inputs,while the countrys exports are increasingly competitive on global markets.Successful responses will require tapping into Chinas shifting patterns of commodity demand and extracting maximum advantage from its outbound direct investment flows.3CAUSES AND IMPACTS u KROEBEROver the past decade China has seen a steady decline in its real GDP growth rate.This rate has declined from an average of 10%in 19802012 to around 7%in the seven years preceding the Covid-19 pandemic(201319)and to less than 5%in the years since China exited the pandemic.Many independent forecasts suggest that Chinas economy will continue to slow in the coming years.The International Monetary Fund,for instance,projects that the real growth rate could slow to around 3%by 2030.1This chapter examines the sources of Chinas economic slowdown,presents policy choices that could improve or degrade Chinas growth prospects,comments on the trajectory of the countrys economic policy,and analyzes changes in the composition of growth.It then concludes by discussing the implications of Chinas growth trajectory for the countrys trade and investment partners,which will be examined in more detail in chapter 3 of this report.Causes of Chinas Slowing Growth:Structural FactorsIn the first two decades of this century,China was considered a“miracle economy.”The Chinese economy grew at an average rate of over 10%until 2012 and at a slower,but still very respectable,rate of around 7%until the onset of the Covid-19 pandemic in 2020.2 In 2021,China had the pandemic largely under control,while the rest of the world struggled with rolling lockdowns.As a result,its two-year average growth rate in 202021(slightly over 5%)was among the worlds strongest.In 2022,however,the tables turned and Chinas economy ground to a virtual standstill under pressure from the fast-spreading Omicron variant of Covid-19 and the collapse of the property market,while most other economies returned to normal.In the years since emerging from the pandemic,Chinas growth has been much weaker than expected,and the country has struggled to hit its target of 5%real growth.Weak growth,combined with deflationary pressure and high debt levels,has led to much speculation that China is headed for a repeat of Japans zero-growth“lost decade”of the 1990s.Chinas economic slowdown is real and permanent,and even more striking when looking at measures other than the real(constant-price)GDP growth rate(see Figure 1).The countrys trend rate in real growth has indeed decelerated from a peak of around 12%in the early 2000s to around 5%in 2024.The slowdown in nominal growth has been even more dramatic,from a peak of around 18%in 200510 to just over 4%in 2024.When nominal growth is converted into U.S.dollarstaking account of exchange-rate movementsthe downshift is even more dramatic,falling from a peak rate of over 20%to under 5%.This trend has been persistent over more than a decade,suggesting that deep structural forces are at play,in addition to the shorter-term buffets of the pandemic and property crashes.We can divide the sources of Chinas slowdown into two broad categories:(1)structural factors,such as the countrys stage of development and demographics,and(2)policy reasons relating to the governments long-term development aims and short-term macroeconomic management.1 International Monetary Fund,“Peoples Republic of China:2024 Article IV Consultation,”IMF Country Report,no.24/258,August 2024,https:/www.imf.org/en/Publications/CR/Issues/2024/08/01/Peoples-Republic-of-China-2024-Article-IV-Consultation-Press-Release-Staff-Report-and-552803.Some private-sector estimates are even more pessimistic.See,for example,Roland Rajah and Alyssa Leng,“Revising Down the Rise of China,”Lowy Institute,March 14,2022,https:/www.lowyinstitute.org/publications/revising-down-rise-china.2 Unless otherwise noted,macroeconomic figures for this report are drawn from World Bank,World Development Indicators,https:/databank.worldbank.org/source/world-development-indicators);IMF,World Economic Outlook,https:/www.imf.org/en/Publications/SPROLLs/world-economic-outlook-databases;and Chinas National Bureau of Statistics,accessed via the CEIC database,available at https:/ i g u r e 1 Chinas GDP slowdown in three measuress o u r c e:National Bureau of Statistics,accessed via the CEIC database,https:/ World Bank,World Development Indicators,https:/databank.worldbank.org/source/world-development-indicators.4NBR SPECIAL REPORT u JUNE 2025This breakdown is inevitably arbitrarystructural factors are also affected by policy decisionsbut still useful in helping understand both the nature of the slowdown and the potential impact of different policy choices on Chinas growth trajectory.The main structural factors are the natural tendency of high-growth developing economies to slow down as they get richer;the exhaustion of growth potential in housing and infrastructure,which powered much of Chinas growth in the first two decades of the twentieth century;and demographic decline.A significant part of Chinas growth slowdown is simply the natural and unavoidable consequence of getting richer.When a country is relatively poor,it can generate huge productivity gains,and hence rapid economic growth,by yoking its low-wage labor force to modern technology.3 As the country grows richer,the big gains achieved by moving workers from low-productivity jobs(e.g.,in traditional agriculture)to high-productivity ones(e.g.,in export manufacturing)run out,and growth slows as it needs to come more from hard-won improvements in efficiency and technology.Chinas economic trajectory closely resembles that of its East Asian neighborsJapan,South Korea,and Taiwanall of which enjoyed long periods of 8%growth,followed by significant decelerations.In the decade after they hit Chinas current income level(about$20,000 per person at purchasing power parity),Taiwans per-capita real GDP growth averaged 6.5%,South Koreas 3 Alexander Gerschenkron,Economic Backwardness in Historical Perspective(Cambridge:Harvard University Press,1962).f i g u r e 2 Comparison of Chinas growth(19902023)with Japan(195593)Japan 1981s o u r c e:World Bank,World Development Indicators;and Penn World Table.5CAUSES AND IMPACTS u KROEBER5.5%,and Japans slightly over 4%.4 At a first approximation,Chinas trajectory over the next decade is likely to follow that of Japan in the 1980s(see Figure 2)rather than the higher-growth paths of its smaller neighbors.The reason is simply that South Korea and Taiwan,as relatively small countries,could rely very heavily on exports to power their growth.Although China is a big exporter that runs a large trade surplus,as a large continental economy its ability to increase the export share of GDP is constrained.South Koreas export-to-GDP ratio was around 30%in the 1980s and 1990s and rose to over 35%in the 2000s.Chinas export ratio,conversely,peaked at 35%in 20067 and then fell after the global financial crisis,as the country turned more to domestic demand(see Figure 3).Its reliance on exports increased again in the early 2020s with a government campaign to shift capital into technology-intensive manufacturing.Even so,the export-to-GDP ratio rose only slightly.Export-led manufacturing will continue to be a key part of Chinas development strategy,and Chinese firms will expand their share of global markets.But it is unlikely that exports alone can generate a major reacceleration of growth in a$18 trillion economy.5The second structural factor is the exhaustion of infrastructure and housing,which were major drivers of growth in the first two decades of the 21st century.This factor is linked to a slowdown in the rate of urbanization(see Figure 4).The urban population share rose from 19%in 1980 to 50%in 2010in absolute terms,from 191 million to 670 million.By 2024,the urban population 4 These figures are all based on purchasing power parity.The figures for Japan are from the Penn World Table,and those for China are from the IMFs World Economic Outlook.5 Data on export/GDP ratios is from the World Bank,World Development Indicators,https:/databank.worldbank.org/source/world-development-indicators.The IMFs 2024 Article IV Consultation projects a decline in Chinas export/GDP ratio.f i g u r e 3 Chinas export/GDP ratio,19952023s o u r c e:National Bureau of Statistics,accessed via the CEIC database.f i g u r e 4 Rate of urbanization,200020302000200520102015202020252030051015202530Annual increase in population(million)YearActualUN model projections o u r c e:National Bureau of Statistics,accessed via the CEIC database;and UN Population Division,World Population Prospects 2024.6NBR SPECIAL REPORT u JUNE 20257CAUSES AND IMPACTS u KROEBERhad risen to 944 million,or 67%of the national total.In other words,from the 1980s until the late 2010s,Chinas urban population grew by around 20 million per year.Since 2020,however,the country has added only around 10 million new urbanites per year,and urban population growth is expected to decline further in the coming years.New urban residents are important drivers of demand not just for housing but for all the goods and services that power a modern economy.As urban population growth slows,so too will the economy.In the late 1990s,the government deregulated the urban housing market,setting off a construction frenzy that saw household fixed investmentin essence,housing purchasessoar from about 6%of GDP in the late 1990s to a peak of 16%in 2013.6 Economists generally estimate that including indirect effects(among other effects,the stimulus of steel,cement,and other heavy industries and purchases of household furnishings),the real estate sector accounted for 250%of GDP during the 2010s.7State-led infrastructure spending was first boosted in the late 1990s with the issuance of special bonds to finance expressway construction and other projects.It continued in the 2000s with the rapid buildout of ports,telecom and power networks,and other infrastructure required to support the manufacturing boom that followed Chinas entry into the World Trade Organization in 2001.Spending on infrastructure received another massive push in 200910,when in response to the global financial crisis the government pumped a stimulus of roughly 15%of two-year GDP into housing and infrastructure projects,financed largely by local governments raising loans against their land holdings.8Much of this investment was needed:in the early 2000s,China suffered from severe shortages of housing and infrastructure.The economic return on investment for the early infrastructure and housing projects was extremely high.Yet,over the next two decades China went from shortage to glut.Housing starts went from severely lagging the growth in urban population to overshooting it.After peaking in 2013,household investment in housing steadily declined to about 12%of GDP in 2020.Since then,it has fallen to around half that as the result of tight policy controls,which are discussed in the next section.9 Meanwhile the buildout of massiveand increasingly underutilizedroad,railway,and power systems meant that by the late 2010s the marginal economic benefit of new infrastructure projects approached zero.Despite these diminishing returns,central and local governments continue to have strong incentives to invest in infrastructure:such investments are the main tool for providing support to the economy during cyclical downturns.The third structural factor is the reversal of the“demographic dividend.”The simple account of the economic impact of demographics is that economies tend to grow more quickly when the working-age cohort(defined as ages 1564)rises as a share of the total population and grow more slowly when the working-age share shrinks:the demographic dividend,followed by demographic drag.10 The reality is a bit more nuanced.India,for instance,has persistently grown more slowly 6 Andrew Batson and Xiaoxi Zhang,“Timing the Property Downturn,”Gavekal Dragonomics,September 5,2024,https:/ Kenneth Rogoff and Yuanchen Wang,“Chinas Real Estate Challenge,”Finance and Development Magazine,December 2024,https:/www.imf.org/en/Publications/fandd/issues/2024/12/chinas-real-estate-challenge-kenneth-rogoff.8 Victor Shih,“Big Rock Candy Mountain,”China Economic Quarterly 14,no.2(2010):2632.9 Batson and Zhang,“Timing the Property Downturn.”10 David E.Bloom,David Canning,and Jaypee Sevilla,The Demographic Dividend:New Perspectives on the Economic Consequences of Population Change(Santa Monica:RAND Corporation,2003),https:/www.rand.org/pubs/monograph_reports/MR1274.f i g u r e 5 Chinas aging population,19802040s o u r c e:UN Population Division,World Population Prospects 2024.n o t e:Data represents the medium-fertility projection.8NBR SPECIAL REPORT u JUNE 2025than China,despite enjoying a similar demographic dividend.Demographersincluding the inventor of the term“demographic dividend”have tempered their claims about the malign economic effects of aging populations,noting that much of the impact can be offset by delaying retirement ages and other policy interventions.11Nonetheless,there is little doubt that demography has shifted from a positive to a negative factor for China(see Figure 5).Between 1980 and 2010,the working-age cohorts share of the population rose from 59%to 73%(in absolute terms,from 600 million people to nearly 1 billion).Chinas average growth during those three decades was about 10%a year.Since 2010,the working-age share has fallen to 69%,and this has coincided with a fall in the average growth rate to 7%in the 2010s and about 5%in the 2020s.In the late 2020s,this decline in the working-age share will accelerate,and by 2045(at the latest)it will be back to its 1980 figure of 59%.In absolute terms,the working-age population will be about 800 million,roughly midway between its 1980 level and the 2010 peak.Furthermore,the population share of retirement-age people is inexorably rising,from about 5%in 1980 to 15%in 2025 and 30%by midcentury.By then,the ratio of working-age people to retirees will be roughly the same as it is in Japan today.As the supply of productive workers shrinks,and the proportion of retirees requiring pension and healthcare assistance grows,economy-wide productivity growth,and hence GDP growth,can be expected to slow.Most of this demographic decline would have happened anyway,as it has in every other industrial economy.11 Bloom et al.,The Demographic Dividend.f i g u r e 6 Chinas labor force participation compared with other countries,20002024s o u r c e:International Labour Organization;China data estimated from census data in National Bureau of Statistics,accessed via the CEIC database;and Arthur Kroeber and Ernan Cui,“How to Fight The Demographic Drag,”Gavekal Dragonomics,Research Note,February 28,2024.9CAUSES AND IMPACTS u KROEBERBut the decline was probably intensified by Beijings reluctance to loosen restrictions on childbirth,which were fully abolished only in 2021.Just how much economic slowing will be driven by demographic drag,however,is unclear.Recent research by the originators of the demographic dividend idea has found that countries can offset up to half of the loss in growth due to demographic drag as citizens extend their productive years by living longer and healthier lives.12 On top of this,Chinas working-age population is very inefficiently deployed.Labor-force participation for those 50 and up is far lower in China than in most member economies of the Organisation for Economic Co-operation and Development(OECD)(see Figure 6).Restrictions on mobility through the hukou(residence permit)system prevent workers from moving to cities,where there is most demand for their skills.Over-regulation of services leads to an excess of low-productivity workers in state-controlled industries and an artificial suppression of higher-productivity employment in the private sector.There is thus plenty of potential policy space for China to offset demographic drag by eliminating barriers to employment for those in their 50s and 60s,boosting labor efficiency through abolishing the 12 Rainer Kotschy and David Bloom,“Economic Prospects in the Face of Population Ageing,”Centre for Economic Policy Research,VoxEU,October 22,2023,https:/cepr.org/voxeu/columns/economic-growth-prospects-face-population-ageing.10NBR SPECIAL REPORT u JUNE 2025remaining barriers to labor mobility,and deregulating service sectors.13 At the same time,there is a significant risk that the demographic drag could have an outsized impact if compounded by policy inflexibility.Causes of Chinas Slowing Growth:Policy FactorsThe factors we have considered so far are all structural and basically unavoidable,although policy can sometimes mitigate or exacerbate their impacts on growth(especially when it comes to demographics and other structural factors that affect productivity).But policy choices by the government not related to structural economic trends have also played a role in Chinas economic slowdown,especially since 2020.Some of these policies are“strategic,”in that they relate to a deliberate,long-run development strategy.At the other end of the spectrum are more“tactical”policies relating to short-term management of the economic cycle.In practice,it is not easy to distinguish neatly between the two,since all policies harbor both short-and long-term effects.But we can identify a linked set of policies that have tended to put downward pressure on growth over the past decade or more.Moving roughly from the more strategic to the more tactical these are the following:Reduced emphasis on market-oriented reforms and increased reliance on state guidance,starting around 2008.Efforts to constrain the growth of credit and reduce financial risk,beginning in late 2016.Efforts to forcibly shift capital away from real estate,infrastructure,and consumer services and toward technology-intensive manufacturing,accelerating after 2020.A crackdown on consumer-facing internet platforms in 202123.The maintenance of relatively tight monetary and fiscal policies in the post-pandemic period of 202324,adjusted with a careful economic support package announced in October 2024.Market Reforms vs.State GuidanceA story commonly told about China is that the last two decades have seen a shift from a broadly pro-market orientation to a policy mix that puts more emphasis on state guidance.14 An alleged consequence of this shift is that productivity growth has fallen for three basic reasons.First,pro-market policies give more space to private firms,which consistently earn a higher rate of return on capital(i.e.,are more productive)than state firms.15 Policies that constrain the private sector or favor the state sector therefore probably reduce productivity growth(see Figure 7).Second,there is evidence that much of Chinas rapid productivity growth in the past came from“creative destruction”in the business sector:less efficient firms going out of business while more efficient firms thrive.It appears that the rate of creative destruction has gone down(i.e.,inefficient firms 13 Arthur Kroeber and Ernan Cui,“How to Fight the Demographic Drag,”Gavekal Dragonomics,February 28,2024.14 Barry Naughton,“Grand Steerage as the New Paradigm for State-Economy Relations,”in CPC Futures:The New Era of Socialism with Chinese Characteristics,ed.Frank N.Pieke and Bert Hofman(Singapore:NUS Press,2022),https:/epress.nus.edu.sg/cpcfutures.15 David Dollar and Shang-jin Wei,“Das(Wasted)Kapital:Firm Ownership and Investment Efficiency in China,”National Bureau of Economic Research,Working Paper,no.13103,May 2007,https:/www.nber.org/system/files/working_papers/w13103/w13103.pdf.f i g u r e 7 Factor contributions to annual GDP growths o u r c e:Adapted from Roland Rajah and Alyssa Leng,“Revising Down the Rise of China,”Lowy Institute,March 14,2022;and Richard Herd,“Estimating Capital Formation and Capital Stock by Economic Sector in China:The Implications for Productivity Growth,”World Bank,Policy Research Working Paper,no.9317,July 2020,25.11CAUSES AND IMPACTS u KROEBERare surviving longer thanks to various forms of state support).16 Finally,the increase of the states role in the economy has led to an increase in the share of capital spending going to infrastructure,which has produced declining returns,and a decrease in the share going to business investment,which is more likely to underpin future productivity gains.There is almost certainly some truth in this narrative.In particular,it is clear that in the late 2010s housing and infrastructure increased their share of fixed investment at the expense of business investment.Up to around 2010,roughly half of fixed investment was in the business sector.But in 201519 that share fell to one-third,while the infrastructure and housing share rose to two-thirds(see Figure 8).17We need to be cautious,however,about how much of Chinas slowing growth can be pinned on a decline in productivity supposedly driven by more state-centric policies.For one thing,productivity growth has slowed in virtually every economy in the world since around 2005,for reasons that are not well understood.18 It is likely that Chinas productivity slowdown is both for 16 Loren Brandt et al.,“Chinas Productivity Slowdown and Future Growth Potential,”World Bank,Policy Research Working Paper,no.9298,June 2020,https:/openknowledge.worldbank.org/handle/10986/33993.17 Richard Herd,“Estimating Capital Formation and Capital Stock by Economic Sector in China:The Implications for Productivity Growth,”World Bank,Policy Research Working Paper,no.9317,July 2020,25,https:/openknowledge.worldbank.org/handle/10986/34126.18 See,for instance,Georg Erber,Ulrich Fritsche,and Patrick Christian Harms,“The Global Productivity Slowdown:Diagnosis,Causes and Remedies,”Intereconomics,January/February 2017,https:/www.intereconomics.eu/contents/year/2017/number/1/article/the-global-productivity-slowdown-diagnosis-causes-and-remedies.html;and Alistair Dieppe,ed.,Global Productivity:Trends,Drivers,and Policies(Washington,D.C.:World Bank,2021).f i g u r e 8 Investment in business and infrastructure as a share of GDP201519s o u r c e:Adapted from Rajah and Leng,“Revising Down The Rise of China”;and Herd,“Estimating Capital Formation and Capital Stock by Economic Sector in China.”12NBR SPECIAL REPORT u JUNE 2025reasons that are specific to China and for reasons that are more global in nature.For another thing,while economists agree that productivity(more precisely,total factor productivity)is the most important driver of long-term economic growth,they do not agree on what causes productivity or even how to measure it consistently.19 The basic problem is that there is no standard method for deciding where additions to capital end and productivity begins.This is an especially large problem for China,which has a very high rate of capital formation(consistently above 40%of GDP)and a statistical system that is heavily biased toward the measurement of physical capital.Controlling Financial Risk and Limiting DebtThe second key policy choice with a major impact on growth is the effort to control debt and financial risk.Up until the 20089 financial crisis,Chinas gross debt(borrowing by the government,households,and nonfinancial corporations)was relatively stable,and not excessively high,at less than 150%of GDP.In the following decade,though,debt rose dramatically.The main reason was that,in response to the financial crisis,the government launched a debt-financed fiscal stimulus program totaling around 15%of aggregate GDP from late 2008 through 2010.20 One of the main mechanisms was local governments use of special-purpose companies to borrow 19 For a good explanation of the problems with measuring productivity,see John G.Fernald,Robert Inklaar,and Dimitrije Ruzic,“The Productivity Slowdown in Advanced Economies:Common Shocks or Common Trends?”Federal Reserve Bank of San Francisco,February 1,2023,https:/www.frbsf.org/research-and-insights/publications/working-papers/2023/02/the-productivity-slowdown-in-advanced-economies-common-shocks-or-common-trends.20 Shih,“Big Rock Candy Mountain.”f i g u r e 9 Debt as a share of GDP,20002024s o u r c e:Chinese Academy of Social Sciences,Center for National Balance Sheets of Institutions for Finance and Development,accessed via the CEIC database.13CAUSES AND IMPACTS u KROEBERagainst the land assets that they controlled(local-government financing vehicles,or LGFVs).Local governments used these borrowed funds to build infrastructure(thereby exacerbating the structural decline in the contribution of infrastructure to growth),help state enterprises buy assets,and cover regular operating expenses.Although local governments were the main culprits,there were other drivers of debt.Financial deregulation between 2009 and 2017 made it much easier for companies and households to borrow,using increasingly complicated structures involving a plethora of non-bank lenders(so-called shadow banking).The long property boom resulted in a big rise in both mortgages and loans to property developers.As a result,gross debt had risen to about 250%of GDP by 2017(see Figure 9).The risk that this debt buildup will trigger a dramatic financial crisis is low.Because almost all the debt is issued by local banks in local currency,foreign creditors cannot prompt a crisis by calling in their loans.Moreover,with the government controlling all of the lenders and many of the borrowers,no group of domestic private actors is big enough to set off a crisis.And the systemically important banks back their loans with a huge pool of low-risk deposits,made possible because of the high national savings rate(around 44%of GDP)and tight capital controls that make it very hard for Chinese citizens to move their money abroad.21 Nonetheless,there is significant risk that excessive debt,used largely to finance low-productivity investments,will be a long-term drag on Chinas growth potential.Hence,this factor is closer to the strategic than the tactical end of the policy spectrum.The government is well 21“China Gross Saving Rate,”CEIC database,https:/ SPECIAL REPORT u JUNE 2025aware of this risk,which is why efforts to control the buildup of debt have been a constant feature of Xi Jinpings time in office.In 201315,local governments were allowed to borrow directly for the first time.The hope was that they would refinance their LGFV debt at lower rates and slow down their debt accumulation;instead,they refinanced and kept borrowing through LGFVs.In 201517,the government launched a campaign to reduce debt and excess capacity in heavy industry(“supply-side structural reform”).This was largely successful,and Chinese companies running real businesses in competitive sectors generally do not have unusually high debt levels.22 In the official debt breakdown shown in Figure 8,over half of the nations gross debt is classified as“corporate.”Yet,this includes a large amount of LGFV debt,which is technically corporatebecause the borrowers are companies not government entitiesbut in reality is disguised local government debt.Starting in 2017,the government launched a“financial de-risking”campaign in order to eliminate risky shadow banking and make it harder for companies and households to pile up debt.This campaign was also successful,although at some cost.Private companies,which are largely shut out of the formal banking system,lost access to a key source of credit,and arguably the recentralization of credit creation in the big state-owned banks made capital allocation more risk-averse and less efficient.23 The re-regulation of finance almost certainly improved financial stability,but it might have had a negative impact on Chinas economic growth.Despite all these efforts,debt has continued to grow and now stands at around 300%of Chinas GDP according to official data.24 The root cause is that many local governments do not have enough revenue sources to fund their operating and capital expendituresespecially since the collapse of the property market,which is discussed laterand transfers from the central government do not fully cover the shortfall.As a result,local governments resort to borrowing to make up their deficits.The solution is comprehensive fiscal reform that would enable localities to match expenditures with revenues,but there is no imminent prospect of such reform taking place.Instead,local governments are going through another round of refinancing,swapping out old debts for new ones with lower interest rates and longer repayment terms.The debt problem impedes growth in two ways.First,the large stock of debt financing low-return investments means that less money is available to finance high-return projects.Second,the desire to prevent debt levels from rising much more means that the government is reluctant to engage in strong monetary or fiscal stimulus to boost the economy when it is weakas was the case in 202324.Crushing the Property Sector and Shifting Capital to High-Tech ManufacturingThe third major set of policies affecting Chinas growth trajectory is the governments drive to reallocate capital away from real estate and toward technology-intensive manufacturing.High-tech manufacturing has long been a focus of Chinese industrial policy,but this focus has intensified in the last decade,essentially for two reasons.First,the government recognized that 22 Thomas Gatley,“The Promise and Peril of Industrial Policy,”Gavekal Dragonomics,August 21,2024,https:/ average debt-to-equity ratio of all listed nonfinancial firms in China fell from 65%in 2013 to 52%in 2023.Excluding real estate firms,the decline in this leverage ratio was steeper,from 62%to 47%.Both state and private firms saw roughly comparable declines.23 Nicholas R.Lardy,The State Strikes Back:The End of Economic Reform in China?(Washington,D.C.:Peterson Institute for International Economics,2019).24 China Academy of Social Sciences,Center for National Balance Sheets of Institutions for Finance and Development,accessed via CEIC database.15CAUSES AND IMPACTS u KROEBERthe infrastructure and property boom was structurally running out of steam,that a new growth engine was required,and that this new engine should rely mainly on innovation and higher total factor productivity rather than on endless inputs of capital.25 Second,the 201819 trade war with the United States and the subsequent U.S.imposition of tight sanctions and technology export controls cemented the leaderships belief that China needed to become self-sufficient in key technologies.A decisive moment in this shift occurred in August 2020,when Beijing issued the“three red lines”policy requiring that property developers drastically reduce their debt and instructing banks to curtail credit to developers.26 This policy can be seen both as an extension of the financial de-risking campaign(because it aimed to reduce property-related debt)and as a move in the capital-reallocation strategy(because it freed up banks to lend more to high-tech manufacturing).The three red lines precipitated a collapse in the national property market.Over the next three years,housing sales fell by half,and the number of new houses under construction fell by over 60%.Most property market indicators began to stabilize in late 2024,but the majority of private(and even some state-owned)developers were still in financial distress.The real estate sector will probably not return to growth until 2026 or 2027a trend that will inevitably constrain GDP growth,given the sectors significant share of GDP,as was discussed earlier.The property crash has produced numerous spillover effectsnotably,lower demand for heavy industrial products and their commodity inputs and a hit to consumer confidence(discussed later).The impact on heavy industry,though substantial,was actually not quite as dramatic as might have been expected,given the large role of housing in the demand for materials.One reason was continued government support for infrastructure investment,despite diminishing returns.Another was rising reliance on export markets,reflecting the disparate channels through which slowing growth can affect trade and investment partners(discussed later).Steel exports,for instance,doubled from 54 million tons in 2020 to 110 million tons in 2024.China exported about 40%more steel than either Japan or the United States produced in that year.27These efforts to force China into a hard techoriented growth track have had a dramatic impact on the composition of the countrys economy.Their ultimate effect on growth is somewhat less clear.The effort to reallocate capital away from property and into manufacturing has succeeded:the volume of new loans to industry rose eightfold between 2019 and 2023,from 590 billion renminbi to 4.8 trillion renminbi(or from$85 billion to$670 billion)(see Figure 10).28 The success of Chinese high-tech manufacturing is now globally evidentand keenly felt by trading partnersthrough Chinas huge exports of electric cars and batteries and massive increases in semiconductor production.Meanwhile,household investment in property has shriveled back to approximately its pre-2000 level.29 On the whole,the most likely outcome of the industrial policyled growth model is for sectoral success in many of the targeted high-tech industries,but also for significantly 25 Central Committee of the Communist Party of China and the State Council of the Peoples Republic of China,“Outline of the National Innovation-Driven Development Strategy,”May 19,2016,trans.Center for Security and Emerging Technology,https:/cset.georgetown.edu/publication/outline-of-the-national-innovation-driven-development-strategy.26“What Chinas Three Red Lines Mean for Property Firms,”Bloomberg,October 8,2020,https:/ Jing Zhang,“Chinas Steel Exports Face Rising Trade Barriers as Antidumping Cases Surge,”S&P Global,February 25,2025,https:/ Data is from Chinas National Bureau of Statistics,accessed via CEIC database.29 Batson and Zhang,“Timing The Property Downturn.”f i g u r e 1 0 Bank lending shift from property to industry(net new medium-/long-term bank loans by sector)s o u r c e:National Bureau of Statistics,accessed via the CEIC database.16NBR SPECIAL REPORT u JUNE 2025weaker growth than would be possible under a more demand-focused strategy.The basic reason is that it is not obvious how successes in high-tech production will create spillovers driving higher productivity and wages in services,which account for the majority of employment and all net new job creation.30Internet Crackdown and Declining Private-Sector ConfidenceAnother policy move executed at around the same time as the three red lines was a severe crackdown on internet companies that began in November 2020 with the cancellation of the initial public offering of Ant Group,a financial-technology spinoff of the e-commerce behemoth Alibaba.After the cancellation,restrictive policies engulfed most of Chinas top internet firms for about two years.The end result of the campaign was that all internet firms were subjected to much tighter regulation,effective prohibitions on certain business activities(such as fintech or online healthcare),and strict controls on collecting,storing,and monetizing data as well as on these firms ability to operate internationally.The internet crackdown had several motivations:a desire to control the financial and social risks posed by unregulated growth in the sector,a desire to prevent internet firms and their founders from becoming alternative sources of political power,and the perceived privilege of investments in hard technologies like semiconductors,industrial automation,and green technology over consumer services.The latter perception was based on the theory that long-term growth in 30 Arthur R.Kroeber,“The Venture Capital State:Implications for Chinas Growth,”in Not Just Another Cold War:The Global Implications of the U.S.-China Rivalry,ed.Brd Nikolas Vik Steen(New York:Oxford University Press,2025),75100.17CAUSES AND IMPACTS u KROEBERproductivity comes more from the these technologies than from consumer services,despite the fact that the less state-influenced,consumer-focused service sector has generally outperformed in terms of returns on capital.While the tighter internet policy affected a minuscule proportion of Chinese private companies,some of the largest and most internationally prominent companies were among those affected.31 The signaling effect was clear:the kind of freewheeling entrepreneurship that had led to the spectacular growth and innovation in Chinas internet sector in the preceding two decades would no longer be tolerated.Instead,future growth in high technology would focus on the hardware sectors that were favored by government industrial policy and posed no risk of social destabilization.This signaling effect doubtless contributed to the sustained downturn in private-sector business and consumer confidence that has plagued the economy since early 2022.Several other factors depressed confidence.Covid-19 lockdowns swept the country in 2022,and unlike in the United States and Europe,people who lost incomes or jobs received no support from the government.As a result,precautionary saving rose and did not fall much after Covid-19 restrictions were lifted at the end of the year.The property crash not only eroded the main store of wealth for households but also hurt small business owners,who often relied on their homes or other property assets to raise loans.Many small businesses had already been hurt by the crackdown on shadow banking.The slowdown of consumer spending meant that consumer-facing businesses were reluctant to invest and hire new employees.This led to a self-reinforcing growth-slowing cycle,as households cut back on spending because they were pessimistic about their employment prospects.Fiscal and Monetary Policy StancesTo summarize,over the past decadeand especially since 2020Chinas leadership has undertaken a suite of strategic policies designed to increase the states control over the economy,reduce debt and financial risk,and remake the Chinese economy as one driven mainly by technology-intensive manufacturing rather than investment in infrastructure and real estate.The stated intention of these measures was to put economic growth on a more sustainable footing and to boost total factor productivity.(Whether the policies are likely to succeed in achieving these goals is another matter,discussed in the next section.)In the short run,however,the overall impact of this policy package has been to reduce economic growth.The basic problem is that the real estate sector directly and indirectly accounted for more than a quarter of Chinas economy;hence,cutting it in half created a massive hole in aggregate demand,which no amount of manufacturing investment could fill.32 Normally,governments respond to shortfalls in aggregate demand by launching stimulus through monetary policy(lower interest rates)or fiscal policy(more government spending).Until the autumn of 2024,Chinas government was reluctant to do either.Why was this the case?The basic reason seems to be that Xi Jinping and his top economic officials believed that a short-term hit to growth is the price to pay for the strategic reorientation of the economy.Their apparent conviction is that long-term growth is driven by investments in the right technology,and that 31 Tianlei Huang and Nicholas R.Lardy,“Is the Sky Really Falling for Private Firms in China?”Peterson Institute for International Economics,October 14,2021,https:/ Gerard DiPippo,“Focus on the New Economy,Not the Old:Why Chinas Economic Slowdown Understates Gains,”RAND Corporation,February 18,2025,https:/www.rand.org/pubs/commentary/2025/02/focus-on-the-new-economy-not-the-old-why-chinas-economic.html.18NBR SPECIAL REPORT u JUNE 2025aggregate demand will eventually pick up once enough of those investments pay off.Short-term efforts to boost demand do not contribute to growth in the long run,and could even create more problems by adding to Chinas already high debt level.33 Nonetheless,by the late summer of 2024,it had become clear that the economy was slowing sharply,and deflationary pressures were deepening.In response,the government in October launched an economic stabilization package,including fiscal and monetary stimulus and measures to support the property and stock markets.Rollout of the program was done in stages,with many of the fiscal measures not being implemented until the release of the 2025 budget at the National Peoples Congress in March 2025.34 Yet,the measures already were having a modest positive effect in the fourth quarter of 2024:retail spending and industrial production had risen significantly,property sales stabilized(at very low levels),and economy-wide deflation fell slightly.At the National Peoples Congress the government set a real GDP growth target of“around 5%”for 2025 and stepped up its rhetoric in support of boosting consumer demand.China will probably achieve 4.5%5%real growth in 2025.Policy statements since October 2024 have made it clear that the government will add stimulus as needed to achieve the target,and various projections reflect that likely outcome.35 Significant additional stimulus will be needed to offset the negative effect of the additional tariffs imposed on Chinese goods by the Trump administration,which will suppress export growth.36However,this stabilization masks substantial problems.Thanks to persistent deflation,nominal growth in China will be weaker than real growth.The downdrafts in consumer and business confidence are unlikely to be corrected soon.The strategic policy direction of focusing on industrial policy as a driver of growth will probably stay in place,ensuring a deflationary bias.The structural factors driving slower GDP growth are thus not going away.In fact,over the next several years,Chinas economy will continue to decelerate.Note on U.S.Tariff PolicyThe above analysis was completed before the Trump administrations tariff announcements of April 2025 that raised tariffs on Chinese imports to over 100%,which subsequently were reduced to around 40%under a temporary agreement reached on May 12.37 If these tariffs stay in place or are increased again,Chinas GDP growth in 2025 will probably be reduced by between 0.5 and 2 percentage points(depending on the actual tariff level),unless the government unleashes 33 Lingling Wei,“China Isnt Planning a Bazooka Stimulusat Least Not This Year,”Wall Street Journal,November 4,2024.https:/ 34 Key elements of the package included interest rate cuts,new or increased funding lines from the Peoples Bank of China to support the purchase of stocks and unsold property,a pledge to issue 10 trillion renminbi in new central government bonds to refinance local government debt and recapitalize the major banks,a target of increasing the central governments deficit spending starting in 2025,various programs to support the property market,and subsidies to encourage both businesses and households to upgrade old appliances and equipment.35 See,for example,“China Sets Bullish Growth Goal of about 5%,Despite U.S.Tariffs,”Bloomberg,March 5,2025;and OECD,OECD Economic Outlook,Interim Report March 2025:Steering through Uncertainty(Paris:OECD Publishing,2025),https:/www.oecd.org/en/publications/oecd-economic-outlook-interim-report-march-2025_89af4857-en.html.36 As of the time of writing in May 2025,U.S.tariffs on most Chinese imports stood at approximately 40%,comprising a 10fective tariff rate resulting from tariffs imposed in 201823,a new 10seline tariff applied to all U.S.imports,and an additional 20%tariff ostensibly in retaliation for Chinas failure to control the export of fentanyl precursor chemicals.37 Daisuke Wakabayashi,Amy Chang Chien,and Alan Rappeport,“U.S.and China Agree to Temporarily Slash Tariffs in Bid to Defuse Trade War,”New York Times,May 12,2025,https:/ of the effective tariff rate on Chinese imports after the Geneva agreement range from 33%to 51%;the actual tariff regime is now so complex that a precise figure is hard to calculate.See“State of U.S.Tariffs:May 12,2025,”Budget Lab at Yale,https:/budgetlab.yale.edu/research/state-us-tariffs-may-12-2025;Chad P.Bown,“U.S.-China Trade War Tariffs:An Up-to-Date Chart,”Peterson Institute of International Economics,May 14,2025,https:/ Arendse Huld,“Breaking Down the U.S.-China Trade Tariffs:Whats in Effect Now?”China Briefing,May 23,2025,https:/www.china- AND IMPACTS u KROEBERadditional fiscal and monetary stimulus.Because of concerns about debt sustainability,the government will likely compromise by providing additional stimulus,while also accepting lower growth.Assuming that the tariffs remain in place beyond the short term,China will probably adjust its policy to enhance the focus on promoting domestic demand and cultivating new export markets for its manufacturers.Given its large internal market and strong comparative advantage in manufacturing,China should be able to weather the trade war stormespecially with all of its competitors in Asia also being subject to high U.S.tariffs.If these tariffs persist in the long run,Chinese growth rates will be somewhat lower than described in this chapter,but so will the growth of most other countries in the world.Chinas growth will still decelerate,but it is possible that growth will be driven more by demand from domestic consumption than by industrial policyled investment.If so,this would be marginally positive for most of Chinas trade partners.Assessment and ConclusionsChinas economy is slowing for a wide range of structural and policy reasons,and continued deceleration is likely to occur throughout the 2020s.Xi Jinping and his advisers now see the governments central economic management task as building up the nations technological capacities,not maximizing growth.Because of this strong supply-side policy bias,disinflationary pressure will be persistent.Although consumer price inflation hovered just above zero in 202324,the broadest measure of economy-wide inflation,the GDP deflator,was negative for seven straight quarters through the end of 2024.Deceleration,however,is not synonymous with disaster.Chinas economy is still by a wide margin the worlds second-largest,with a GDP of roughly$18 trillion,and despite some misplaced concerns,it is unlikely to replicate Japans experience of a zero-growth“lost decade.”38 Even if its average real growth slows to 3%over the next decade,as long as the exchange rate stays stable,China will contribute more than twice as much to global GDP growth over the decade as India,which is expected to grow at least twice as fast.39The comparison with 1990s Japan is worth a closer look.There are some superficial similarities:both countries experienced a huge property market collapse,had high debt levels,and experienced sustained deflation.But the differences are more salient.The Japanese asset price bubble of the 1980s was severe:the prices of both land and equities rose sixfold between 1980 and 1989.40 This necessitated a correspondingly large collapse in asset prices(around 80%)after 1990.China has suffered no such asset bubble:domestic equity prices rose by just 15%in the 2010s,and the official index of new urban housing prices rose by just 65%.41 Its property sector had a problem of severe overbuilding,but not of wildly inflated prices.The other critical difference is that in Japan banks 38 This concern has been frequently aired in the media since 2023.See,for instance,“Does China Face a Lost Decade,”Economist,September 10,2023,https:/ Chinas 2024 GDP was$18.8 trillion at current exchange rates;Indias was$3.9 trillion.If Chinas real GDP grows at an average of 3.5%starting in 2025,and Indias grows at 7%,then(ignoring exchange rate movements)China will add$7.7 trillion to GDP over the next decade,while India will add$3.77 trillion.Data is from World Bank,World Development Indicators.40 Shuichi Uemura and Takeshi Kimura,“Japanese Share Prices,”Bank for International Settlements,BIS Conference Papers,no.5,March 1998,http:/bis.org/publ/confp05g.pdf.41 Chinas data,which is an average of 70 cities,understates the rapid price appreciation of housing in the most desirable cities such as Beijing,Shanghai,and Shenzhen.But BIS data on home prices,which tries to create a standardized measure across countries,reports that prices in China rose 54%from the beginning of 2010 to the peak in mid-2021.By contrast,home prices rose by 128%in Japan in the decade before the 1991 peak and by 149%in the United States in the decade before the 2006 peak.“Residential Property Prices,”BIS,Data Portal,https:/data.bis.org/topics/RPP.20NBR SPECIAL REPORT u JUNE 2025and industrial companies owned shares in each other,and the underlying value of these shares was heavily determined by land values.42 Thus,when inflated land values collapsed,both corporations and banks were caught together in a classic debt-deflation spiral in which everyone tries to sell assets at once to pay down debt,but the resulting fall in asset prices perversely causes the real value of debt to rise rather than fall.43 In China,cross-shareholdings of this type are prohibited(precisely because of the lessons from Japan),and the exposure of the large systemically important banks to property developers is relatively small.The result is that in contrast with the unified balance-sheet collapse that Japan suffered,Chinas problem is fragmented.Property developers,many local governments,and some state enterprises have big debt problems,whereas much of the productive corporate sector does not,and the banking system as a whole is still able to expand the total supply of credit.Chinas property and debt problems are very serious and will take more time to resolve,but they do not fundamentally constrain the nations ability to keep investing in productive new assets.The base case,therefore,is that Chinas economy continues to grow,but at a slower rate than in the past.The most likely trajectory over the next decade is a continued deceleration from the current real growth rate of 4%5%to 3%4%,followed by stabilization.Slower growth will be accompanied by persistent deflationary pressure,which China could export to the rest of the world through lower prices of manufactured goods.For the rest of the world,therefore,the key variable for gauging Chinas impact is not the speed of its growth but the changes in its composition.With respect to this point,the most important findings are the following:Despite much talk over the past decademost recently through discussions of“dual circulation”there is no sign that Chinas economy is fundamentally“rebalancing”from investment-led to consumption-led growth.Its policy clearly supports a continued high investment ratio of around 40%of GDP.However,the focus of investment is shifting away from property and infrastructure to technology-intensive manufacturing.This policy focus will keep the manufacturing share of GDP relatively high(probably above 20%)for some years to come.However,China is not immune to the natural tendency of economies to become more service-oriented as they grow richer.The service sector has,since the early 2010s,accounted for all net new job creation.As the service sectors share of GDP continues to grow,the trend rate of economic growth will fall,since as a general rule it is harder to generate rapid productivity gains in services than in manufacturing.Reliance on external demand will remain at least as high as it is today and could grow.The question is how much of this external demand will be tapped by exports,and how much by Chinese companies internationalizing their operations and setting up production bases overseas.China could certainly achieve a higher growth rate through a different policy mix.More growth-friendly policies would include a greater emphasis on domestic demand,deregulation of the service sector to push up productivity across the widest swath of workers,and comprehensive fiscal and financial reforms to boost capital efficiency.However,such a comprehensive change in policy direction is improbable under the current leadership,although piecemeal reform efforts 42 Uemura and Kimura,“Japanese Share Prices.”43 Irving Fisher,“The Debt-Deflation Theory of Great Depressions,”Econometrica 1,no.4(1933):33757,https:/fraser.stlouisfed.org/files/docs/meltzer/fisdeb33.pdf f i g u r e 11 Comparison of Chinas and Japans nominal GDP as percentage of U.S.nominal GDP%Japan 1995China 2021s o u r c e:International Monetary Fund,World Economic Outlook Database,https:/www.imf.org/en/Publications/SPROLLs/world-economic-outlook-databases.21CAUSES AND IMPACTS u KROEBERare possible.The industrial policyled growth model that began to be articulated with the Made in China 2025 plan in 2015 is now firmly entrenched throughout the Chinese system,and the political urgency of prioritizing technological development and self-sufficiency over GDP growth was cemented by the deterioration of relations with the United States over two successive U.S.administrations of different parties in 201724.On the other hand,the broad-based economic stabilization package launched in the autumn of 2024 shows the limits of the leaderships tolerance for a weak economy.Although debt levels are high,the central government still has significant spare capacity to mobilize resources to support growth if it feels that the need is urgent enough.It would therefore be unwise to bet on Chinas growth falling much below the 3%4%range in the coming decade.The cost of maintaining this spare capacity,however,is a high wall of capital controls to ensure that savings stay inside the country rather than leaking out through capital flight.This will constrain Chinas ability to internationalize its currency or underwrite large-scale non-dollar international payment systems.Chinas economic outlook over the next decade can be described in two pictures.The first shows that on its new,slower growth trajectory China is unlikely to overtake the United States as the worlds biggest economy,though it is equally unlikely to follow Japans relative decline after 1995(see Figure 11).Hence,while China will continue to play a central role in the global economy,it will fall short of playing a dominant one.As the second picture shows,however,Chinas position as the worlds biggest manufacturing power is secure and is unlikely to erode even as its growth slows(see Figure 12).Chinese industry enjoys economies of scale,a competitive domestic market that enables rapid innovation(as illustrated by the sudden emergence of Chinese companies as f i g u r e 1 2 Comparison of Chinas share of global manufacturing added with other countries,19802022s o u r c e:World Bank,World Development Indicators.22NBR SPECIAL REPORT u JUNE 2025global leaders in electric vehicle and battery technology),a large pool of well-trained and relatively low-cost labor,and ample government support.Efforts to stem the tide of Chinese-manufactured exports through protectionism,or to force reshoring or nearshoring of supply chains away from China,might succeed in a few targeted sectors but are unlikely to diminish the global market share of Chinese industrial companies.What they could do is accelerate the pace of globalization by Chinese firms,so that a greater proportion of those market-share gains come from localized production in other countries rather than exports from China.The economic challenge for the rest of the world,then,will be to maximize the benefits from a China that is growing more slowly but playing a more active role in global supply chains.23the national bureau of asian researchnbr special report#118|june 2025DAVID GITTER is a PhD student in the School of Public and International Affairs at Princeton University and the founder and principal of Erelas LLC,where he leads specialized research of Indo-Pacific affairs to inform public-and private-sector stakeholders.He is also a Nonresident Fellow at the National Bureau of Asian Research.He can be reached at.NOTE:The author is deeply grateful to Zaki Atia and John Broach,whose countless hours of Chinese-language research and insightful analytical contributions significantly informed and elevated this assessment.Chinas International Economic Narratives in an Age of Slowing GrowthDavid GitterEXECUTIVE SUMMARYThis chapter analyzes Chinas international messaging strategy for economic engagement amid domestic economic slowdown,low consumer spending,and eroding foreign investor confidence.MAIN ARGUMENTAs China faces an economic contraction and declining foreign investor confidence,Beijing seeks to reinject positivity into its economic image through external narratives that project strength,market liberalization,and support for globalization.Chinas international economic narratives are a facet of its broader set of economic challenges and subsequent engagement strategies with foreign stakeholders.Five central narratives support Chinas economic objectives:(1)attracting foreign investment,(2)convincing foreign investors of Chinas greater reform and liberalization,(3)advancing Chinas intellectual property and market access rights,(4)countering foreign de-risking efforts,and(5)navigating foreign trade barriers and technology restrictions.Beijings information operators use targeted messaging techniques to encourage favorable trade positions from foreign stakeholders while dissuading unwanted policies.Such increasingly asymmetrical trade practices,however,will likely undermine Beijings messaging as it seeks to counter international calls for the diversification of supply chains.POLICY IMPLICATIONS Despite growing trade frictions and international economists recommendations for China to transition to a consumer-driven economy,its policies signal that the country is unlikely to meaningfully liberalize its market in the near term as it doubles down on its export-led growth model.Nonetheless,Beijings official messaging to foreign investors aims to disavow criticisms surrounding trade deficits,low consumer confidence,and supply chain risks.Chinas carefully curated narratives surrounding its asserted world-class business environment,embrace of intellectual property rights,and promotion of the rule of law work to conceal the unequal treatment of foreign firms competing in the Chinese market.Foreign stakeholders who buy into these narratives in the pursuit of profitability may ultimately provide one-sided contributions to Chinas technological,talent,and supply chain ecosystems.Due to Beijings apparent unwillingness to abandon its export-led growth model,trade frictions will continue for the foreseeable future and likely induce protectionist policies globally to rebalance trade and reduce reliance on China.Beijing will find it increasingly challenging to convince foreign trade partners of the win-win nature of economic engagement as trade deficits widen.25CHINAS INTERNATIONAL ECONOMIC NARRATIVES u GITTERChinas international narratives about its economy play a key(albeit difficult to measure)role in ensuring that foreign countries and companies remain open to providing the capital,resources,talent,and market access on which the countrys continued economic health depends.These narratives are grounded in authoritative Chinese Communist Party(CCP)documents that are then tailored to the interests and sensibilities of their targeted foreign audiences.This chapter seeks to examine the strategies employed by Beijing to advance Chinas economic engagement interests with foreign stakeholders.While the messaging techniques utilized by Beijing share commonalities with generalized norms of diplomacy and communication,their effectiveness stems from deliberate,audience-specific deployment to achieve their desired policy outcomes through consistent messaging across authoritative publications,diplomatic channels,and official statements.Beijings overarching public diplomacy objective is to guide global opinion and monopolize discourse on China abroad.In the realm of economic engagement,this involves a two-pronged approach of amplifying positive stories that highlight the success of Chinas economic model while suppressing competing economic narratives that Beijing sees as hostile to its agenda.1Beijings communication techniques have grown increasingly sophisticated.Once central leadership establishes key talking points or slogans,they are enshrined in party orthodoxy upon dissemination in National Party Congress documents,five-year plans,Central Economic Work Conferences,and the CCPs official mouthpieces,such as the Peoples Daily.2 In addition to tasking official messengers from channels such as the Ministry of Foreign Affairs(MFA)and the Ministry of Commerce(MOFCOM)with the repeated dissemination of these slogans,Beijing has become increasingly adept at expanding Chinas messaging in local media outlets abroada strategy it refers to as“borrowing mouths.”3 As of 2022,it had established over four hundred content-sharing partnerships with local media organizations.4 This approach effectively masks the Chinese governments role while leveraging local media credibility,often leaving citizens unaware that they are consuming curated content.Beijings economic messaging coherence proves most convincing when grounded in the partial truths and genuine concerns that resonate with foreign actors economically invested in the Chinese market,either by addressing their anxieties or by appealing to profit-driven aspirations.Chinas external-facing rhetorical strategy is specifically designed to exploit historical engagement strategies toward Beijing,which presupposed that supporting Chinese economic development would translate into democratic reforms and peaceful integration into the international systeman expectation that ultimately proved unfounded.5 Nonetheless,Beijings messengers still seek to exploit this diminishing expectation by curating an image of sustained market liberalization that fosters a welcoming environment to foreign investment.Beijings task is more difficult than it was a decade ago due to factors such as the challenges in recovering from the Covid-19 pandemic,heightened criticisms surrounding intellectual 1 Katja Drinhausen et al.,“Image Control:How China Struggles for Discourse Power,”Mercator Institute for China Studies(MERICS),September 2023,https:/www.stiftung-mercator.de/content/uploads/2024/07/MERICS-Report_Image-Control.pdf.2 Wu Guoguang,“Command Communication:The Politics of Editorial Formulation in the Peoples Daily,”China Quarterly 137(1994):194211.3 Drinhausen et al.,“Image Control.”4 Samantha Custer,“Minutes and Transcript:Quarterly Public Meeting on Understanding the PRCs Approach to Public Diplomacy,”U.S.Advisory Commission on Public Diplomacy,January 16,2025,5,https:/www.state.gov/wp-content/uploads/2025/02/ACPD-January-2025-QM-Transcript-Final.pdf.5 Aaron L.Friedberg,Getting China Wrong(Cambridge:Polity Press,2022).26NBR SPECIAL REPORT u JUNE 2025property(IP)theft,pressure from advanced democracies to reduce dependency on the Chinese supply chain,and rising tariffs and technology export controls.Perhaps most obviously,the CCP regimes many external-oriented messengers can only demur on Chinas failure to appreciably boost domestic demand,which has been hampered by the governments unwillingness to implement meaningful policies to spur this shift,as detailed in chapter 1 of this report.6 Messengers regularly understate the weakness in domestic demand and continue to play into foreign firms hopes for Chinas grand domestic market.In its internal and external promulgations,the Xi Jinping regime has consistently emphasized the importance of developing“new productive forces”that rely less on labor-intensive manufacturing and leverage new technologies to improve efficiency under a“new growth model.”7 To achieve the advanced industrialization and innovation levels sought by the regime as part of this model,foreign inputs remain critical in everything from semiconductors and artificial intelligence(AI)to operating systems and advanced manufacturing equipment.Moreover,another closely related goal is facilitating new sources of foreign technical know-how to reduce Chinas reliance on foreign“chokepoint”technologies as soon as possiblea concern exacerbated by U.S.president Donald Trumps second term.8 As alluded to above,foreign observers have noted Beijings 14th Five-Year Plan prioritized a strategic shift toward technological self-sufficiency and resiliency-building measures that bolster China against disruptions in global supply chains.Its rhetoric reflects these goals.Although Beijing today continues to benefit from comparative advantages in technology-intensive manufacturing,technical talent,and economies of scale,it must work harder to make sure that foreign stakeholders believe they can tap into these advantages.Foreign concerns regarding IP protection,new risks stemming from geopolitical competition,and Chinas drive for self-reliance must be addressed satisfactorily,if not directly.Beijings narratives,therefore,have also promoted the enhanced rule of law and protection of economic stakeholder rights,as well as the removal of structural barriers to international trade and investment.9 The imperative of Chinas“dual circulation”strategy presents unique challenges.By advancing an economic model where the Chinese economy features two growth enginesone focused domestically and the other externallyBeijing makes clear that domestic self-reliance is to be complemented by increased Chinese export dominance(an objective that is reinforced by the aforementioned weaknesses in domestic consumer demand).The result is a nonreciprocal approach by design,felt by Chinas trade partners at home(via trade imbalances,dumping,and other unfair trade practices)and within China(via a lack of market access and an unequal playing field).In this light,the issue of how external narratives navigate these nonreciprocal engagements is worthy of study.6 Michael Pettis,“Why Is It So Hard for China to Boost Domestic Demand?”Carnegie China,July 31,2024,https:/carnegieendowment.org/posts/2024/07/why-is-it-so-hard-for-china-to-boost-domestic-demand?lang=en.7 Xi Jinping,“中国共产党第二十次全国代表大会报告”Report of the 20th National Congress of the Communist Party of China,October 16,2022;Xi Jinping and Li Keqiang,“2020年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2020,December 18,2020;Xi Jinping and Li Keqiang,“2021年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2021,December 10,2021;Xi Jinping and Li Keqiang,“2022年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2022,December 16,2022;Xi Jinping and Li Qiang,“2023年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2023,October 31,2023;and Xi Jinping and Li Qiang,“2024年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2024,December 12,2024.8 19th Central Committee of the Chinese Communist Party,“中华人民共和国国民经济和社会发展第十四个五年规划和2035年远景目标纲要”Outline of the 14th Five-Year Plan for National Economic and Social Development of the Peoples Republic of China and the Long-Term Objectives for 2035,March 12,2021.9 19th Central Committee of the Chinese Communist Party,“第十四个五年规划”;and Xi,“中国共产党第二十次全国代表大会报告.”27CHINAS INTERNATIONAL ECONOMIC NARRATIVES u GITTERChinas increasingly domestically oriented direction also drives the CCP regimes defensive rhetorical emphasis on principled,win-win engagement with the world economy.Beijings international narratives thus declare Chinas outward embrace of globalization and economic integration with every region and contrast it with Washingtons agenda,which is portrayed as self-centered and short-sighted.These narratives advertise Chinas pursuit of integration through the Belt and Road Initiative(BRI),despite recent rhetoric signaling that investment is scaling down to“small but beautiful”BRI projects,and showcase Beijing as a champion of free trade in global bodies and groupings.10 What follows is an analysis of five broad external narratives that serve to facilitate five core imperatives of the Chinese economy:(1)narratives aimed at attracting foreign investment and trade,(2)domestic and international narratives for reform and liberalization,(3)narratives about intellectual property rights(IPR),fair market access,and rule of law,(4)trade dependency strategies and narratives against de-risking/decoupling,and(5)narratives regarding navigating global trade barriers and tech restrictions.These narrative-centered sections explain how the propaganda and information operators of the Peoples Republic of China(PRC)here defined as all CCP regime messengers tasked with communicating politically driven statements to advance regime goalsutilize specific techniques and even specific phrases in order to adaptively incentivize desired foreign actions while dissuading unwanted policies.Beijing employs three primary rhetorical tactics in its economic messaging abroad.First,“strategic redirection”pivots or deflects conversations away from criticism toward topics that present China more favorably.Second,“cherry-picking”involves citing carefully selected statisticsoften through“borrowed”foreign expertise to bolster credibilitywhile ignoring broader economic context.Third,“selective omissions”rhetorically misrepresent Chinas economic statecraft by highlighting only minor sectors that portray the countrys industrial policy in a positive light,while concealing less flattering aspects.International observers may be struck by the simplicity of the tactics outlined in this chapter and the transparent attempts to distort and co-opt international economic norms,but there need not be anything mysterious or complex in Beijings economic narratives to effectively sell its circumstantial needs.This chapter concludes with an overview of these techniques and a brief assessment of their efficacy.Narratives Aimed at Attracting Foreign Investment and TradeAs Chinas economic slowdown continues,the government faces a critical imperative to project confidence in the countrys economic trajectory as part of broader efforts to incentivize foreign investment and tradewhich it views as necessary components of an effective solution to address Chinas growth challenges.Following the Covid-19 pandemic,these challenges come at a pivotal time as the country adapts to what it acknowledges as a“new normal”a period described as 10“实打实、沉甸甸的成就习近平总书记出席第三次”一带一路”建设座谈会侧记”Real and Significant Achievements:A Side Note of General Secretary Xi Jinpings Attendance at the Third Symposium on the Construction of the Belt and Road Initiative,Xinhua,November 21,2021,http:/ Jinping,“Building an Open,Inclusive and Interconnected World for Common Development,”Third Belt and Road Forum for International Cooperation,October 18,2023,http:/www.beltandroadforum.org/english/n101/2023/1018/c124-1175.html;and Wang Hao and Chang Qin,“开创共建一带一路更加光明的未来习近平总书记在第四次一带一路建设工作座谈会上的重要讲话引发与会人员热烈反响”Creating a Brighter Future for the Joint Construction of the Belt and Road InitiativeGeneral Secretary Xi Jinpings Important Speech at the Fourth Symposium on the Construction of the Belt and Road Initiative Aroused Enthusiastic Responses from the Participants,Peoples Daily,December 3,2024,http:/ SPECIAL REPORT u JUNE 2025slower,but more sustainable,“high-quality”growth amid a complex global environment.11 Despite its recognition of these challenges,the PRCs economic narratives continue to promote the countrys growing domestic market as a primary incentive to attract foreign capital.Beijing presents a prima facie plausible case for this narrative.Its commitment to economic revitalization is repeatedly demonstrated in policy priorities and economic messaging present in the CCPs Central Economic Work Conference,where boosting domestic consumption consistently emerges as a fundamental objective.12 This focus was further reinforced on February 21,2025,when Premier Li Qiang convened a State Council study session specifically aimed at identifying and implementing measures to enhance consumer spending.13 However,official messaging on domestic consumption belies a broader strategic challenge facing the Chinese economy.Over the past decade,China has maintained a notably low consumption rate as a percentage of its GDPa persistent concern highlighted by international economists and discussed in detail in chapter 1.In response to international media ringing the alarm belloften eroding foreign investors confidence in the Chinese marketBeijing has developed a two-pronged messaging strategy disseminated for foreign audiences.First,it emphasizes concrete steps to transition toward a more consumer-driven economy.Second,it works to counter what Xinhuas English media has characterized as the“consumption crisis”myth shared overseas.14 The ultimate goal of this message is to portray China as a dynamic economy with a“prosperous and thriving”Chinese consumer market(中国消费市场的红火兴旺)that remains an attractive destination for global investment and imports.First,to assuage foreign investors concerns,Beijing communicates that its consumer spending issue is already under control through effective central government management.One key way it conveys this message is by highlighting a few selective economic policies that qualify as stimulus measures while deliberately omitting reference to its lack of stimulus in more consequential sectors.15 For example,China Daily,one of Beijings English-language party mouthpieces,identifies the lack of domestic demand perceived by economists and foreign investors as stemming from a“problem of income distribution,”emphasizing the need to direct more income from corporations to consumers.16 In this spirit,Beijing has touted to foreign audiences through State Council press conferences that it is cutting mortgage rates by 0.5%and issuing 300 billion yuan in government 11 Hu Jintao,“中国共产党第十八次全国代表大会报告”Report of the 18th National Congress of the Communist Party of China,November 8,2012.12 19th Central Committee of the Chinese Communist Party,“第十四个五年规划”;Xi and Li,“2020年中央经济工作会议”;Xi and Li,“2021年中央经济工作会议”;Xi and Li,“2022年中央经济工作会议”;Xi and Li,“2023年中央经济工作会议”;and Xi and Li,“2024年中央经济工作会议.”13“李强主持国务院第十二次专题学习”Li Qiang Presided over the 12th Special Study of the State Council,Xinhua,February 20,2025,http:/ Chinas Pro-Consumption Policies Are Not Meant to Be Effervescent Tablets,”Xinhua,November 13,2024,https:/ Daniel Zipser,“Robust Growth Dispels Myths about Chinas Consumption,”China Daily,November 25,2024,https:/ Zhu Chao and Lu Junyu,“外交部：中国消费市场红火兴旺反映各界对中国经济发展信心提升”Ministry of Foreign Affairs:The Booming Chinese Consumer Market Reflects the Growing Confidence of all Sectors in Chinas Economic Development,Xinhua,February 13,2025,http:/ Xu Gao,“Better Income Distribution Can Create Demand,”China Daily,September 11,2023,https:/ Ke and Ou Yangjie,“上半年最终消费支出对经济增长的贡献率达到77.2%消费对经济拉动作用逐步增强（年中经济观察）”Final Consumption Expenditure Contributed 77.2%to Economic Growth in the First Half of the Year the Role of Consumption in Driving the Economy has Gradually Increased(Midyear Economic Observation),Peoples Daily,July 27,2023,http:/ Lin Zhaomu,“增强消费对经济发展的基础性作用（人民要论）”Enhance the Fundamental Role of Consumption in Economic Development(Peoples Opinion),Peoples Daily,October 18,2023,http:/ INTERNATIONAL ECONOMIC NARRATIVES u GITTERbonds to facilitate the adoption of advanced industrial and consumer technology.17 While these stimulus measures are designed to incentivize trade-ins to promote greater consumption,in practice they offer a negligible economic impact and fail to provide the direct income support experts say is necessary to drive broader demand.Notably,both former U.S.Treasury secretary Janet Yellen and International Monetary Fund chief economist Pierre-Olivier Gourinchas made the case in October 2024 that Beijings current stimulus measures are not enough to boost domestic demand and absorb excess productionan argument supported by the analysis provided in chapters 1 and 3 of this report.18 Policy responses from the central government still fall short of the meaningful structural reforms that international observers have suggested are necessary to reinvigorate household consumption.For example,essays published by both the Financial Times and Rhodium Group have urged measures that include addressing Chinas rural-urban divide,allocating significant fiscal reserves into social welfare and financial stabilization,and implementing a comprehensive fiscal overhaul.19To attract foreign investment,official messaging also portrays China as encouraging a consumer-driven economy that is making strides to expand its imports,selectively highlighting a few industries where this holds true.20 For example,Chinese vice-premier Ding Xuexiang at Davos 2025 told the world,“We dont seek trade surplus;we want to import more competitive quality products and services to promote balanced trade.”21 Complementing this international narrative,Chinese media emphasizes that China is the“worlds second-largest importeraccounting for 10.6 percent of global imports.”22 Official messengers suggest that Beijing is pushing favorable policies for foreign goods to China while cherry-picking annual statistics that show import increases in select sectors such as wine,fruits,clothing,computer parts,electronic components,and manufacturing equipment.23Yet many of these imports,especially the ones with the highest increases,are often in areas where China is specifically seeking foreign technical expertise or has no real domestic alternative.24 For example,Beijing deliberately increased its imports of computer and electronic components before semiconductor export controls took effect and in anticipation of more stringent measures to come.Beijing highlights temporary increases in electronics imports as evidence of its commitment to addressing trade imbalances with other nations.However,these import surges are narrow 17“China Unveils Fresh Stimulus to Boost High-Quality Economic Development,”Xinhua,September 24,2024,https:/ Council of the Peoples Republic of China(PRC),“3000亿元国家支持！四部门喊你领更新换新补贴”300 Billion Yuan in National Support!Four Departments Are Calling on You to Receive the Renewal Subsidy,July 26,2024,https:/ Wang Keju,“Renewals,Trade-ins Unlock Investment,Consumption,”China Daily,October 28,2024,https:/ David Lawder,“Chinas Stimulus Measures Not Enough,Yellen and IMF Chief Economist Say,”Reuters,October 22,2024,https:/ Camille Boullenois et al.,“How Can China Boost Consumption?”Rhodium Group,February 10,2025,https:/ Haohsiang Ko,“China Government Spending on Citizens Lags Behind Economic Peers,”Financial Times,February 22,2025,https:/ Zhu Chao and Lu Junyu,“外交部:中国消费市场红火兴旺反映各界对中国经济发展信心提升”Ministry of Foreign Affairs:The Booming Chinese Consumer Market Reflects the Growing Confidence of All Sectors in Chinas Economic Development,Xinhua,February 14,2025,http:/ Ding Xuexiang,“Davos 2025:Special Address by Ding Xuexiang,Vice-Premier of the Peoples Republic of China,”World Economic Forum,January 21,2025,https:/www.weforum.org/stories/2025/01/davos-2025-special-address-ding-xuexiang-vice-premier-china.22 Zhang Yiyi,“Chinas Expanding Imports Boost Global Economic Growth Momentum:Report,”Global Times,November 3,2024,https:/ Foreign Trade Hits New High in 2024,”Xinhua,January 13,2025,https:/ Fan Feifei,“Consumers Pull Out All Stops for High-Quality,Foreign Brands,”China Daily,September 16,2024,https:/ 19th Central Committee of the Chinese Communist Party,“第十四个五年规划.”30NBR SPECIAL REPORT u JUNE 2025in scope,chiefly serving Chinas national interests tied to obtaining“chokehold technologies”rather than being emblematic of genuine trade diversification across multiple sectors.25 Beijings external narratives generalize from these anecdotes to foster positive foreign investor sentiment in preferred strategic industries.Foreign investors who buy into these narratives in the pursuit of profitability may ultimately provide one-sided contributions to Chinas technological,talent,and supply chain ecosystems.Alongside arguments about sufficient stimulus measures and increased imports,official messaging in some cases downright rejects the premise that there is any problem with consumer spending by suggesting that domestic consumption of foreign brands is currently enjoying an unprecedented high.Serving as a rebuttal to international economists,MFA spokespeople consistently communicate that Chinas consumer market is more“prosperous and thriving”than ever before and provides“opportunities for countries around the world.”26 However,the anecdotal data points used focus on Chinas 2025 Spring Festivala time similar to the end-of-year holiday season in the United Statesreflecting a seasonal uptick in consumer spending that does not accurately represent year-round consumption trends.27To push back against allegations of lagging consumption,CCP mouthpieces also cherry-pick select industries,such as cosmetics and skincare products,to highlight consumption of imports,but they fail to address broader concerns in the market like stagnant growth,low consumer confidence,and declining imports.28 China has more explicit,albeit conflicting,external narratives on such consumption.For example,two China Daily articles highlight increased demand for foreign brands,whereas another article contradicts them,stating that“young consumers no longer blindly pursue foreign brands and instead prefer local brands.”29 These contradictory narratives showcase the PRCs balancing act between projecting national confidence in Chinese products and enticing foreign brands to further invest in the Chinese market.In summary,through selective omissions,misrepresentations,and anecdotal cherry-picking,Beijings messaging on its lagging consumer market primarily communicates three narratives,each marked by a significant gap between rhetoric and reality.First,the central government argues that it is implementing sufficient stimulus measures to revitalize consumer confidence.In practice,most international economists(including Arthur Kroeber in chapter 1)believe these incremental measures fall short of the systemic reform needed to reverse Chinas household consumption slump.Second,Beijing implies it is broadly expanding imports in all sectors to 25“Commerce Strengthens Export Controls to Restrict Chinas Capability to Produce Advanced Semiconductors for Military Applications,”U.S.Department of Commerce,Bureau of Industry and Security,Press Release,December 2,2024,https:/www.bis.gov/press-release/commerce-strengthens-export-controls-restrict-chinas-capability-produce-advanced-semiconductors-military;Yuki Furukawa,“Japan Tightens Export Controls on More Chip and Quantum Tech,”Bloomberg,April 26,2024,https:/ to Expand Export Controls on Semiconductor Equipment,”Reuters,January 15,2025,https:/ C.Allen,Emily Benson,and Margot Putnam,“Japan and the Netherlands Announce Plans for New Export Controls on Semiconductor Equipment,”Center for Strategic and International Studies(CSIS),April 10,2023,https:/www.csis.org/analysis/japan-and-netherlands-announce-plans-new-export-controls-semiconductor-equipment;and Ben Jiang,“Chinas 2024 Chip Imports Surged 10.4%to US$385 Billion amid Tighter U.S.Tech Sanctions,”South China Morning Post,January 13,2025,https:/ Guo Jiakun,“2025年2月13日外交部发言人郭嘉昆主持例行记者会”Foreign Ministry Spokesperson Guo Jiakuns Regular Press Conference on February 13,2025,Ministry of Foreign Affairs(PRC),February 13,2025,https:/ Ibid.28 Fan,“Consumers Pull Out All Stops”;and Logan Wright et al.,“No Quick Fixes:Chinas Long-Term Consumption Growth,”Rhodium Group,July 18,2024,https:/ Fan,“Consumers Pull Out All Stops”;Zipser,“Robust Growth Dispels Myths”;and Guan Lixin,“The Young Lead New Trends in Consumption Market,”China Daily,January 4,2024,https:/ INTERNATIONAL ECONOMIC NARRATIVES u GITTERencourage a new economic growth model that drives higher consumer confidence and provides foreign firms more opportunities.However,the overall increase in imports is limited to specific sectors such as“chokehold technologies,”and,more crucially,these import statistics remain severely imbalanced relative to Chinas surge in exports.30 This reflects a strategy that is a featurenot a bugof Chinas current export-led growth model.Finally,Beijings third talking point attempts to dismiss household consumption concerns entirely,claiming that negative reports are merely a product of foreign exaggeration.Under even minimal scrutiny,however,this last argument loses credibility by contra
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ECONOMIC AND STEEL MARKET OUTLOOKQ3 REPORTData up to,and including,Q1 202520252026September 2025economic and steel market outlook 2025-2026third quarter report3EXECUTIVE SUMMARYThe current trend in EU apparent steel consumption,despite two modest consecutive rebounds over the last two quarters driven by comparison with very low volumes recorded a year earlier continues to reflect weak demand conditions.These conditions originated in the second quarter of 2022 due to war-related disruptions,coupled with unprecedented increases in energy prices and production costs.This negative cycle has persisted until the third quarter of 2024,mainly as a result of growing global economic uncertainty,higher interest rates before eight policy rate cuts were implemented-overall manufacturing weakness,and growing uncertainty surrounding U.S.tariffs.The consequences of the conflict in Ukraine and the energy shock on steel-using industries,along with worsened overall economic outlook,triggered a severe recession(-8%)already in 2022.These protracted downside factors further impacted apparent steel consumption,resulting in two other consecutive annual drops in 2023 and 2024(-6%and-1.1%,respectively).In 2025,contrary to earlier expectations of a more favourable industrial outlook and improving steel demand,apparent steel consumption is set to decline again,albeit more moderately than previously foreseen(-0.2%,formerly-0.9%).This will be driven by the expectedalbeit difficult to quantifyimpact of U.S.tariffs and the resulting uncertainty and trade-related disruptions.In 2026,apparent steel consumption is projected to finally recover( 3.1%,previously set at 3.4%),conditional on a positive evolution of the industrial outlook and an easing of global tensions,both of which remain unpredictable at this stage.Apparent steel consumption is set to experience another drop(-0.2%,more moderate than the previously forecasted,-0.9%).In 2026,apparent steel consumption is finally projected to rebound( 3.1%,formerly 3.4%),conditional on a positive evolution of the industrial outlook and easing trade and global geopolitical tensions,which all are unpredictable at the moment.The overall evolution of steel demand remains subject to very high uncertainty.Apparent steel consumption is not expected to improve substantially before the first quarter of 2026,and consumption volumes are expected to remain far below pre-pandemic levels.EU STEEL MARKET OVERVIEWIn the first quarter of 2025,apparent steel consumption increased year-on-year( 2.2%)for the second time in a row( 0.5%in the preceding quarter,after three consecutive quarterly drops).Total consumption volume in the first quarter of 2025 stood at 33.8 million tonnes.Domestic deliveries mirrored the evolution in demand and increased year-on-year( 1.4%,after-2%in the preceding quarter).In 2024,they economic and steel market outlook 2025-2026third quarter report4decreased overall(-2.8%),reflecting persistently weak steel demand.Imports into the EU-including semi-finished products slightly decreased(-0.6%)in the first quarter of 2025,after a marked rise in the preceding quarter( 6.3%).It is worth noting that in absolute volumes the share of total imports out of apparent consumption has remained considerably high in historical terms up to the first quarter of 2025,standing at 25%(27%in the preceding quarter).In the entire year 2024,the share of imports stood at 27%.Over the second quarter of 2025,total imports continued to decrease(-3%).EU STEEL-USING SECTORSIIn the first quarter of 2025,the Steel Weighted Industrial Production index(SWIP)sharply dropped for the fifth consecutive time(-3.2%,after-4.6%in the preceding quarter).Until the end of2023,EU steel-using sectors output continued to show resilience and grow,albeit at a slower pace,despite the prolonged impact of Russias invasion of Ukraine,overall manufacturing weakness and global geopolitical tensions-with trade-related issues emerging more recently-,weighing on industrial confidence and business investment.The positive trend in overall SWIP,started after the pandemic,continued up to the fourth quarter of 2023,in spite of soaring energy prices impacting production costs,component shortages and lower output that began to take their toll on total production activity in steel-using sectors in the second half of 2022.The deterioration of the economic and industrial outlook in the EU particularly due to high inflation and the subsequent interest rate hikes by the European Central Bank(ECB)had only a limited impact on steel-using sectors output up to the end of 2023,with the exception of the construction sector.As the industrial and economic landscape in the EU turned even gloomier throughout 2024,the evolution of the SWIP index has reflected a continued downturn in the construction,mechanical engineering,domestic appliances and metalware sectorsand particularly in the automotive industry,which is most exposed to volatility in global trade and supply chain disruptions.Due to U.S.tariffs both announced and implemented-ongoing economic uncertainty is likely to intensify,weighing on growth also in the coming quarters.This is expected despite monetary easing by the ECB,which implemented eight consecutive 25 bps policy rate cuts between 2024 and 2025,the effects of which will not be fully visible in the short-term.Despite persisting downside factors,steel-using sectors output continued to grow in 2023( 1.7%,revised from 1.6%),albeit with wide differences across individual European economies and sectors.This was largely driven by the better-than-expected performance of the construction sector in some EU countries.However,SWIP resilience came to an end in 2024,and steel-using sectors output growth contracted on a yearly basis(-3.6%,revised from-3.7%).This was mainly due to drops in construction and automotive output(-2%and-9.8%,respectively).Due to growing uncertainty following U.S.tariff announcements,another recessionalbeit a more moderate one is anticipated in 2025,(-0.7%,formerly-0.5%),before a moderate rebound( 1.8%)in 2026.CONCLUSIONSThe ongoing economic uncertainty is set to continue affecting steel market growth from the demand side over the upcoming quarters:1.Despite EU industry proving quite resilientthroughout 2023,output in steel-using sectors in the EU contracted in 2024,mainly driven by declines in the construction and automotive sectors.The outlook for 2025 and 2026 remains overshadowed by a worsening combination economic and steel market outlook 2025-2026third quarter report5of very high tariff-related uncertainty,weak conditions in manufacturing sectors and consequently lacklustre steel demand-severe geopolitical tensions,and broader economic challenges.Notwithstanding repeated monetary easing in the euro area,its effects on the economic cycle will not be visible in the short-term.2.While output grew more than expected( 2.9%)in 2022,in 2023 SWIP growth slowed down( 1.7%),albeit with wide differences among individual EU economies and industrial sectors.In 2024,growth in steel-using sectors declined more sharply than previously estimated(-3.6%vs.-3.3%),primarily due to the recessions in Please note that,since the Q1 2025 Economic and Steel Market Outlook,the new base year underlying the indices of production activity for all steel-using sectors is 2021.Accordingly,all time series have been revised.the two largest steel-consuming sectors-construction and automotive.Persistent geopolitical tensions and the delayed effects of monetary easing weighted on the overall manufacturing sector.3.Another contraction,albeit milder,is expectedin 2025(-0.7%,slightly revised downwards from-0.5%),particularly due to the expected contraction in output in the automotive sector(-4.2%)and the very low growth in construction output( 0.4%),which is set to only partly benefit from continued monetary easing.SWIP is then projected to recover modestly( 1.8%,formerly 1.3%)in 2026.economic and steel market outlook 2025-2026third quarter report6CONTENTSEXECUTIVE SUMMARY.3EU STEEL MARKET OVERVIEW.3EU STEEL-USING SECTORS.4CONCLUSIONS.4CONTENTS.6THE EU STEEL MARKET:SUPPLY.8REAL STEEL CONSUMPTION.8FIRST QUARTER OF 2025.8APPARENT STEEL CONSUMPTION.9FIRST QUARTER OF 2025.9EU DOMESTIC AND FOREIGN SUPPLY.10IMPORTS.10IMPORTS BY COUNTRY OF ORIGIN.11IMPORTS BY PRODUCT CATEGORY.11EXPORTS.12EXPORTS BY COUNTRY.13TRADE BALANCE.14THE EU STEEL MARKET:FINAL USE.15OUTLOOK FOR STEEL-USING SECTORS.15TOTAL ACTIVITY IN THE FIRST QUARTER OF 2025.15TOTAL FORECAST 2025-2026.15CONSTRUCTION INDUSTRY.17ACTIVITY IN THE FIRST QUARTER OF 2025.17FORECAST 2025-2026.17PAST TRENDS.18AUTOMOTIVE INDUSTRY.19ACTIVITY IN THE FIRST QUARTER OF 2025.19EU PASSENGER CAR VEHICLE DEMAND.19FORECAST 2025-2026.19PAST TRENDS.20MECHANICAL ENGINEERING.21ACTIVITY IN THE FIRST QUARTER OF 2025.21FORECAST 2025-2026.21PAST TRENDS.21economic and steel market outlook 2025-2026third quarter report7STEEL TUBE INDUSTRY.22ACTIVITY IN THE FIRST QUARTER OF 2025.22FORECAST 2025-2026.22PAST TRENDS.22ELECTRIC DOMESTIC APPLIANCES.23ACTIVITY IN THE FIRST QUARTER OF 2025.23FORECAST 2025-2026.23PAST TRENDS.23EU ECONOMIC OUTLOOK 2025-2026.24GDP GROWTH.24ENERGY PRICES.25INFLATION.26MONETARY POLICY.26CONFIDENCE AND LEADING INDICATORS.27ECONOMIC SENTIMENT INDICATOR(ESI).27GLOBAL SUPPLY CHAIN PRESSURE INDEX(GSCPI).27EU INDUSTRIAL PRODUCTION.28GLOSSARY OF TERMS.29METAL GOODS.29EU STEEL MARKET DEFINITIONS30ABOUT THE EUROPEAN STEEL ASSOCIATION(EUROFER).31ABOUT THE EUROPEAN STEEL INDUSTRY.31economic and steel market outlook 2025-2026third quarter report8THE EU STEEL MARKET:SUPPLYREAL STEEL CONSUMPTIONFIRST QUARTER OF 2025In the first quarter of 2025,real steel consumption decreased for the eleventh consecutive quarter(-5.5%,following-7.6%in the fourth quarter of 2024).Real steel consumption decreased in 2023(-2.4%)and,more severely,also in 2024(-4.4%,slightly revised from-4.7%).The decline is projected to continue also in 2025(-2.3%,revised upwards from-3.3%).Given the protracted economic and industrial uncertainty and low business confidence,some re-stocking along the steel distribution chain is not be expected at least before the first quarter of 2026.The two consecutive recessions of 2019 and 2020 were caused by a considerable slowdown in the activity of steel-using sectors due to a downturn in manufacturing and trade,and the COVID crisis,respectively.The pronounced destocking trend that started in late 2019 has persisted to date.The trend of weak demand conditions has continued throughout 2023 and 2024,given the protracted impact of the war in Ukraine,growing geopolitical and trade tensions,and uncertainty on the global industrial outlook.Although de-stocking has continued at very high historical levels-reflecting poor demand perspectives-real consumption growth was negative in 2022,2023 and also in 2024.The recession is projected to continue in 2025(-2.3%)while a modest recovery in expected in 2026( 0.8%),in line with SWIP developments.Forecast for real consumption-%change year-on-yearPeriod2024Q125Q225Q325Q4252025Q125Q225Q325Q4252026%Change-4.4-5.5-2.4-3.12.3-2.31.10.10.71.40.8EU Real Steel ConsumptionForecast from Q2-2025Million tonnes per month(left axis)Year on year change(right axis)-201820192020202120222023202420252026-30-27-24-21-18-15-12-9-6-30369121518212427309101112131415%-changemlnTpmeconomic and steel market outlook 2025-2026third quarter report9APPARENT STEEL CONSUMPTIONFIRST QUARTER OF 2025In the first quarter of 2025,apparent steel consumption increased year-on-year for the second consecutive quarter( 2.2%),after the moderate increase seen in the last quarter of 2024( 0.5%),following three consecutive quarterly drops.Total consumption volume in the first quarter of 2025 stood at 33.8 million tonnes.The current trend in EU apparent steel consumption despite two recent consecutive rebounds reflecting the very low historical volumes seen one year earlier continues to mirror weak demand conditions,originating in the second quarter of 2022 due to war-related disruptions,unprecedented rises in energy prices and production costs.This negative cycle has continued until the third quarter of 2024,mainly as a result of growing global economic uncertainty,higher interest rates before eight policy rate cuts were implemented-and overall manufacturing weakness,now coupled with growing uncertainty around U.S.tariffs.The consequences of the conflict in Ukraine and the energy shock on steel-using industries,along with worsened overall economic outlook,triggered a severe recession(-8%)already in 2022.These protracted downside factors further impacted apparent steel consumption,resulting in two other consecutive annual drops in 2023 and 2024(-6%and-1.1%,respectively).In 2025,contrary to earlier expectations of a more favourable industrial outlook and improving steel demand,apparent steel consumption is set to decline again,albeit more moderately than previously foreseen(-0.2%,revised from-0.9%).This will be driven by the expectedalbeit difficult to quantifyimpact of U.S.tariffs and the resulting uncertainty and trade-related disruptions.In 2026,apparent steel consumption is projected to finally recover( 3.1%,revised downwards from 3.4%),conditional on a positive evolution of the industrial outlook and an easing of global tensions,both of which remain unpredictable at this stage.The overall evolution of steel demand remains subject to very high uncertainty.No improvement in apparent steel consumption is expected before the first quarter of 2026,and consumption volumes are expected to remainfar below pre-pandemic levels.EU Apparent ConsumptionForecast from Q2-2025Year-on-year change(right axis)Million tonnes per month(left axis)201820192020202120222023202420252026-35-30-25-20-15-10-505101520253035409101112131415%-changemlnTpmeconomic and steel market outlook 2025-2026third quarter report10EU DOMESTIC AND FOREIGN SUPPLYIn the first quarter of 2025,domestic deliveries mirrored the evolution of demand and increased year-on-year( 1.4%,after-2%in the preceding quarter).In 2023,they markedly dropped(-4.6%)and continued to decline in 2024(-2.8%),reflecting persistently weak steel demand.Imports into the EU-including semi-finished products slightly decreased(-0.6%)in the first quarter of 2025,after a rise in the preceding quarter( 6.3%).It is worth noting that in absolute volumes the share of total imports out of apparent consumption has remained considerably high in historical terms up to the first quarter of 2024,standing at 25%(27%in the preceding quarter).In the entire year 2024,the share of imports stood at 27%.Over the second quarter of 2025,total imports continued to decrease(-3%).EU apparent steel consumption-in million tonnes per yearYear201620172018201920202021202220232024 2025(f)2026(f)Million tonnes147149153145129150138130129128132IMPORTSIn the second quarter of 2025,total steel imports(including semis)into the EU decreased year-on-year(-3%),following the moderate decrease seen in the preceding quarter(-1%,or-0.6%).Imports of finished products also dropped(-7%)in the second quarter of 2025,after remaining unchanged in the previous quarter.During the same period,imports of flat products decreased(-9%)after a contraction in the preceding quarter(-2%).Imports of long products decreased(-2%),after a significant increase( 8%)in the previous quarter.In 2024,imports of finished products increased overall( 7%).In particular,imports of flat products rose( 8%),along with imports of long products( 4%).Imports have displayed increasing volatility throughout 2024 and up to date,mirroring the fluctuations seen in the four preceding years.Reflecting much weaker demand since the first quarter of 2022,imports have been declining in volume from the second half of 2022 to the second quarter of 2023,before increasing again over the entire year 2024.Overall,trade data available for the first and second quarters of 2025 are still too early to reveal a clear impact of U.S.tariffs.However,disruptions stemming from very high trade-related uncertainty have been increasing over the last quarters.It is therefore premature to draw conclusions about the evolution of trade patterns,which remain highly unpredictable at this stage.In any case,even in the second quarter of 2025 imports have remained at elevated historical volumes,resulting in very high import shares out of apparent consumption(25%),as well as in a widening trade deficit vis-vis third countries.Forecast for apparent consumption-%change year-on-yearPeriod2024Q125Q225Q325Q4252025Q125Q225Q325Q4252026%Change-1.12.2-1.1-1.6-0.5-0.21.83.64.52.33.1economic and steel market outlook 2025-2026third quarter report11IMPORTS BY COUNTRY OF ORIGINIn the second quarter of 2025,the main countries of origin for finished steel imports into the EU market were,in descending order:Turkey,South Korea,China,India and Ukraine.The top five exporting countries in the first six months of 2025 accounted for 57%of total EU finished steel imports.Turkey held the leading exports share to the EU(21%),followed by South Korea(12%),China(9%),Ukraine and India(8ch)and Taiwan(7%).In the second quarter of 2025,imports from major exporting countries showed diverging developments.Imports of finished products recorded the sharpest increase from Ukraine( 44%)and Turkey( 41%)and also surged,albeit more moderately,from China( 11%).On the other hand,imports of finished products plunged from India(-50%),Japan(-40%),Taiwan(-17%)and South Korea(-16%).IMPORTS BY PRODUCT CATEGORYAccording to customs data,in the second quarter of 2025 imports of flat products into the EU market decreased(-9%),along with imports of long products(-2%).The share of long products out of total finished steel product imports was 23%.Overall,imports of finished products decreased(-7%).Within the flat product market segment,imports of all flat products decreased during the second quarter of 2025 compared to the same period of 2024,with the only exception of imports of organic( 5%).Imports of hot-rolled wide strip contracted(-3%),along with coated sheets(-9%),cold rolled sheets(-23%),hot dipped(-12%)and quarto plate(-9%).In relation to long products,imports in the second quarter of 2025 decreased for wire rod(-11%),and rebars(-24%),whereas imports of heavy sections and merchant bars increased( 29%and 39%,respectively).EU Total Steel ImportsFinished products1000 tonnes per month(left axis)Year on year change(right axis)economic and steel market outlook 2025-2026third quarter report12EXPORTSIn the second quarter of 2025,total EU exports of steel products to third countries decreased(-12%,after a small increase of 1%in the preceding quarter).Similarly,exports of finished steel products dropped(-10%),following another decrease in the first quarter(-2%).In particular,exports of flat products contracted(-5%)and so did exports of long products,but much more severely(-20%).Throughout the entire year of 2024,exports of finished products rose( 4%),due to an increase in exports of both flat( 4%)and long products( 3%).-Hot Rolled Wide Strip,683Hot Dipped,396Cold Rolled Sheet,224Wire Rod,208Quarto Plate,169Merchant Bars,153Rebars,109Organic,86Tin Mill Products,64Heavy Sections,31EU Finished Steel Imports by ProductQ2-2025,(monthly 000 metric tonnes)EU Finished Steel Imports by CountryQ2-2025,(monthly 000 metric tonnes)EU Total Steel Exports1000 tonnes per month(left axis)Year on year change(right axis)-40-35-30-25-20-15-10-505101520251100160021002600192225Q220-Q1Q4Q3Q223-Q1Q4Q3Q2FebMayAugNovFebMayAugNovFebMayAugNovFebMayAugNovFebMayAugNovFebMayAugNovFebMay%-change1000TpmTurkey,454South Korea,253China,189Ukraine,185India,184Taiwan,149economic and steel market outlook 2025-2026third quarter report13EXPORTS BY COUNTRYIn the second quarter of 2025,the main destinations for EU steel exports were the United Kingdom,the United States,Turkey,Switzerland and Egypt.The first five destinations together accounted for 60%of total EU finished product exports.Among the major export destinations,exports of finished products rose to the United Kingdom( 12%),Serbia( 4%)and Brazil( 1%).By contrast,exports to the United States contracted(-18%)along with exports to Switzerland(-4%),Turkey(-14%),China(-17%),Egypt(-41%)and Norway(-15%).EXPORTS BY PRODUCT CATEGORYIn the second quarter of 2025,exports of finished products dropped(-10%)as a result of a decrease both in flat and long product exports(-5%and-20%,respectively).During the same period,flat products accounted for 68%of finished product exports overall.In 2024,exports of finished products increased( 4%),due to a rise in exports of both flat( 4%)and long products( 3%).Among flat products,over the second quarter of 2025 exports of all main products decreased:cold rolled sheets(-16%),quarto plate(-9%),coated sheets and hot dipped(-5ch).The only exception were exports of hot rolled wide strip,which increased( 9%).Exports of all individual long products contracted over the same period,particularly exports of rebars(-49%),followed by wire rod(-27%),heavy sections(-15%)and merchant bars(-14%).Total Exports to Third CountriesFinished Steel Products(metric tonnes)economic and steel market outlook 2025-2026third quarter report14TRADE BALANCEIn the second quarter of 2025,total trade deficit(including semis)amounted to 1.7 million tonnes per month(1,747 kilotonnes).In 2024,the total trade deficit averaged 1.4 million tonnes per month(1,404 kilotonnes),very similar to the level recorded in 2023(1,355 kilotonnes).As for finished products,the trade deficit over the second quarter of 2025 was 976 kilotonnes per month.This resulted from the combination of a deficit of 876 kilotonnes per month for flat products and a deficit of 100 kilotonnes per month for long products.In 2024,the deficit for finished products amounted to 892 kilotonnes per month,resulting from a deficit of 900 kilotonnes for flat products and a surplus of 7 kilotonnes for long products.The largest trade deficits for finished products with individual trade partners over the second quarter of 2025 were with Turkey(294 kilotonnes),South Korea(259 kilotonnes),China(163 kilotonnes),India(158 kilotonnes),Ukraine(152 kilotonnes),Taiwan(150 kilotonnes),Indonesia(125 kilotonnes)and Vietnam(106 kilotonnes).The major destination countries for EU finished steel exports with a finished product trade surplus in the second quarter of 2025 were the United States(192 kilotonnes per month),the United Kingdom(142 kilotonnes)and Switzerland(74 kilotonnes).Coated Sheet,281Hot Dipped,228Hot Rolled WideStrip,168Heavy Sections,138Quarto Plate,129Cold Rolled Sheet,127Wire Rod,98Merchant Bars,73Rebars,41EU Finished Steel Exports by DestinationQ2-2025,(monthly 000 metric tonnes)EU Finished Steel Exports by ProductQ2-2025,(monthly 000 metric tonnes)United Kingdom,265United States,195Turkey,160Switzerland,115Egypt,35China,34Algeria,34Norway,29Brazil,28India,27Serbia,27economic and steel market outlook 2025-2026third quarter report15THE EU STEELMARKET:FINAL USEautomotive industry,is most exposed to volatility in global trade and supply chain disruptions.Due to U.S.tariffs both announced and implemented-ongoing economic uncertainty is likely to intensify,weighing on growth also in the coming quarters.This is expected despite monetary easing by the ECB,which implemented eight consecutive 25 bps policy rate cuts between 2024 and 2025,the effects of which will not be fully visible in the short-term.TOTAL FORECAST 2025-2026Despite persisting downside factors,steel-using sectors output continued to grow in 2023( 1.7%,revised from 1.6%),albeit with wide differences across individual European economies and sectors.This was largely driven by the better-than-expected performance of the construction sector in some EU countries.However,SWIP resilience came to an end in 2024,and steel-using sectors output growth contracted on a yearly basis(-3.6%,revised from-3.7%).This was mainly driven by drops in construction and automotive output(by-2%and-9.8%,respectively).Due to growing uncertaintyfollowing U.S.tariff announcements,another recessionalbeit a more moderate one is anticipated in 2025(-0.7%,formerly-0.5%),before a moderate rebound( 1.8%)in 2026.Total steel-using sectors output had increased more than expected( 2.8%)in 2022,following the rebound in 2021( 8.2%),after the sharp decline recorded in 2020(-9.8%)due to the impact of the pandemic.OUTLOOK FOR STEEL-USING SECTORSTOTAL ACTIVITY IN THE FIRST QUARTER OF 2025In the first quarter of 2025,the Steel Weighted Industrial Production index(SWIP)sharply dropped for the fifth consecutive time(-3.2%,after-4.6%in the preceding quarter).Until the end of 2023,EU steel-using sectors output continued to show resilience and grow,albeit at a slower pace,despite the prolonged impact of Russias invasion of Ukraine,overall manufacturing weakness and global geopolitical tensions,-with trade-related issues growing more recently weighing on industrial confidence and business investment.The positive trend in overall SWIP,started after the pandemic,continued up to the fourth quarter of 2023,in spite of soaring energy prices impacting production costs,component shortages and lower output that began to take their toll on total production activity in steel-using sectors in the second half of 2022.The deterioration of the economic and industrial outlook in the EU particularly due to high inflation and the subsequent interest rate hikes by the European Central Bank(ECB)had only a limited impact on steel-using sectors output up to the end of 2023,with the exception of the construction sector.As the industrial and economic landscape in the EU turned even gloomier throughout 2024,the evolution of the SWIP index has reflected a continued downturn in the construction,mechanical engineering,domestic appliances and metalware sectorsand particularly in the economic and steel market outlook 2025-2026third quarter report16Year-on-Year%-Change in EU Steel Weighted Industrial Production(SWIP)Index%Share in total consumption2024Q125Q225Q325Q4252025Q126Q226Q326Q4262026Construction37-2.00.2-0.20.90.90.41.82.02.72.72.3Mechanical engineering12-5.1-2.9-1.1-1.4-1.4-1.70.00.72.72.51.4Automotive19-9.8-11.4-5.30.80.3-4.23.72.4-0.3-0.61.3Domestic Appliances5-4.91.1-0.31.31.60.90.60.61.12.01.1Other Transport35.70.5-1.8-1.00.0-0.61.41.82.83.22.3Tubes6-2.5-3.00.02.71.10.12.7-1.10.21.20.7Metal Goods16-3.2-1.9-1.8-1.20.6-1.11.62.43.32.72.5Miscellaneous3-1.60.01.93.33.32.11.82.5-0.31.71.4Total100-3.6-3.2-1.20.80.8-0.72.11.61.81.71.8Production index(left axis)EU Steel Using SectorsProduction Activity-Forecast from Q2-2025Year-on-year change(right axis)17CONSTRUCTION INDUSTRYACTIVITY IN THE FIRST QUARTER OF 2025Construction output has been under pressure since the third quarter of 2022 due to several factors,including rising construction material prices,labour shortages in some EU countries,and increasing economic uncertainty,despite continued public support to civil engineering and various infrastructure projects linked to the implementation of the NEXTGEN EU package.Most notably,higher interest rates in 2022 and 2023,driven by monetary policy tightening,have also played a key role.Although the ECB has recently implemented eight policy rate cuts,their impact has yet to be fully seenparticularly in the housing marketas monetary policy effects typically materialise with a time lag.In the first quarter of 2025,output in the sector marginally recovered after four consecutive slumps( 0.2%,following-1.6%in the preceding quarter).Uncertainty on the performance of the sector is expected to persist until the third quarter of 2025,driven primarily by the lagged effects of lower interest rates.While further monetary policy easing cannot be ruled out,it largely depends on future price developments.In line with real production volumes,the weakness in the sector has been confirmed also by the latest quarterly developments in investment in construction,which showed subdued year-on-year developments for the fifth consecutive time in the first quarter of 2025(a mere growth of 0.2%,after-1.7%in the preceding quarter).As expected,residential investmentwhich is highly sensitive to interest ratesdeclined for the tenth consecutive quarter,reflecting the delayed impact of monetary easing on mortgage interest rates(-1.5%,after-4.2%in the fourth quarter of 2024).Conversely,relatively more positive trends were observed in recent quarters in other construction investment,particularly in civil engineering( 1.8%,after 0.9%).Public construction is projected to continue economic and steel market outlook 2025-2026third quarter reportexpanding throughout 2025 and 2026,albeit at a moderate pace,supported by the accelerated implementation of NextGenerationEU-related public investment schemeswhich must be completed before 2026.Some additional support is expected from greater flexibility in EU fiscal rules,despite the application of the revised Stability and Growth Pact.FORECAST 2025-2026Governments have been using public construction spending as a countercyclical tool since the COVID-led recession of 2020 to bolster recovery.While overall construction activity is expected to continue benefitting to a limited extent from governmental housing support and public construction schemes,the impact of these publicly-funded projects eased somewhat during 2024.However,the implementation of public construction projects linked to the NextGenerationEU scheme is likely to gain momentum in 2025 and 2026,as the deadline for utilising its funding approaches at the end of 2026.Construction confidence has been declining since March 2022 and has remained in negative territory ever since,as confirmed by the latest available data(July 2025).As a result,the construction sectorafter showing resilience in 2023( 1.4%),albeit with significant differences across Member States experienced a contraction in output in 2024(-2%).The sector is anticipated to experience minimal growth in 2025( 0.4%,formerly flat)due to persistently weak housing demand,and a stronger recovery in 2026( 2.3%,revised from 0.8%),primarily driven by the anticipated effects of monetary easing.economic and steel market outlook 2025-2026third quarter report18PAST TRENDSThe positive trend in construction output observed since the fourth quarter of 2020(eight consecutive quarters of growth)came to an end already in the third quarter of 2022(-0.6%)and the downturn has continued since,as reflected in the data of the last two quarters(drops in oput of-2.1%and-1.6%,respectively).The sector had experienced a vigorous rebound in 2021( 6.3%),largely boosted by generous governmental support schemes at EU and national level,primarily construction projects linked to NextGenerationEU that will be available until 2026 and benefitting the private residential and civil engineering sub-sectors,after the decline in 2020(-4.8%)due to the pandemic.EU Construction SectorProduction Activity-forecast from Q2-2025Production index(left axis)Year-on-year change(right axis)-15-10-505101520859095100105110115120%-changeIndex 2021=100201820192020202120222023202420252026economic and steel market outlook 2025-2026third quarter report19AUTOMOTIVE INDUSTRYACTIVITY IN THE FIRST QUARTER OF 2025In the first quarter of 2025,the automotive sectors output sharply decreased for the fifth consecutive quarter(-11.4%,following-12.1%in the preceding quarter).The positive cycle observed from the second quarter of 2022 to the fourth quarter of 2023 a rebound stemming from comparison with the very low output volumes experienced in 2021 and 2022 came to an end by late 2023.This shift was driven by a deeply worsening outlook for the sector,with growing supply-side uncertainty over EV production standards and infrastructure on the way to 2025 targets,along with demand-side challenges from declining household real income and high inflation in 2023 and part of 2024.However,output in the sector has always remained well below the levels seen before the pandemic and even below those seen before the pre-COVID recession in 2019.During 2025,this negative trend has been exacerbated by continued trade tensions,particularly the announcement of U.S.tariffs on EU car exports,which are likely to further dampen European carmakers investment decisions and output.EU PASSENGER CAR VEHICLE DEMANDContinued supply chain issues causing order delays,war-related disruptions,low consumer confidence and low growth in disposable incomes and economic uncertainty,have continued to weigh on EU car demand.In July 2025,new passenger car registrations dropped(-0.7%on a year-to-date basis),although in the same month registrations rose by 7.4%.The battery-electric car market share reached 15.6%(YTD),up from 12.5%in July 2024,but still well below expectations for progress towards the 2035 target of a full phase-out of petrol car sales.Sales of hybrid-electric models continued to expand,remaining the most popular powertrain among buyers(34.7%of the market).By contrast,petrol car registrations dropped by-20%in the same month,with all major national markets posting declines.Consequently,the combined market share of petrol and diesel cars fell to 37.7%,down from 47.9%a year earlier.FORECAST 2025-2026In 2023,despite the overall subdued investment outlook,automotive output rebounded more robustly than expected( 9%).However,output levels have remained low in historical terms,far below the levels seen in 2018 and 2019.Due to the protracted weakness of the manufacturing sector,overall EV standards uncertainty and lacklustre consumer confidence,the sector experienced a sharp contraction in output in 2024(-9.8%,revised from-9.7%).Output in the automotive sector is now set to suffer from increasing global uncertainty,continued trade tensions and very low confidence,resulting in another annual drop(-4.2%,steeper than the previously estimated-2.6%).A modest recovery is expected in 2026( 1.3%),with absolute output volumes far below 2019 levels.Demand is projected to remain weak until the macroeconomic picture and consumer disposable income substantially improve,given the rather unpredictable economic outlook and uncertain economic growth perspectives.Demand had shown resilience against uncertainties around the implementation of EVs and delays in the launch of new models-most are hybrid or fully electric,preparing the ground for the ban of petrol cars by 2035 which have proven unsupportive factors of consumer demand.Coupled with the lack of facilities such as recharging points,they have also delayed investment decisions by carmakers.A full recovery in global trade and external demand from major marketsparticularly the economic and steel market outlook 2025-2026third quarter report20United States and Chinanow appears to be unlikely,given escalating global trade tensions,especially in light of recently announced U.S.tariffs(15%on EU car exports).Major challenges are expected to persist,notably concerning Chinese EV export volumes to EU markets but also as regards the U.S.,where in addition the Inflation Reduction Act(IRA)is expected to further stimulate domestic EV production.PAST TRENDSAutomotive was hit more than any other steel-using sectors during the pandemic in 2020,resulting in a very severe slump(-18.7%).Subsequently,output modestly rebounded( 2.6%)in 2021.In 2022,the sector grew robustly( 5.3%)thanks to a very positive performance in the first half of the year,despite the impact of war-related disruptions and the very severe energy shock in the EU,also due to the very low output levels seen for several quarters since 2021.201820192020202120222023202420252026-60-40-20020406030507090110130%-changeIndex 2021=100EU Automotive SectorProduction Activity-forecast from Q2-2025Production index(left axis)Year-on-year change(right axis)economic and steel market outlook 2025-2026third quarter report21MECHANICAL ENGINEERINGACTIVITY IN THE FIRST QUARTER OF 2025In the first quarter of 2025,output in the mechanical engineering sector fell for the sixth consecutive time(-2.9%,after-4.3%).Driven by the post-COVID industrial recovery,the rebound seen in previous quarters during 2022 and 2023 had brought output back to absolute high levels,even above those recorded before 2019.However,the sectors growth had remained exposed to ongoing downside risks,including the prolonged impact of Russias invasion of Ukraine,increasing global geopolitical tensions and the continued deterioration of the industrial outlook,as observed throughout 2023 and 2024.Consequently,the sectors output began to shrink in the fourth quarter of 2023 and amid growing international trade tensions and uncertaintyis expected to continue on a downward path also throughout the remainder of 2025.A return to growth is projected only in the second quarter of 2026,albeit subject to uncertainty.FORECAST 2025-2026Despite the aforementioned challenges,mechanical engineering output grew in 2023( 1.7%).However,the sector experienced a pronounced contraction in output in 2024(-5.1%).Another recession,albeit more moderate,is anticipated in 2025(-1.7%),with a modest recovery projected only in 2026( 1.4%,revised from 1.1%).PAST TRENDSIn 2022,the sector grew robustly( 5.2%)thanks to a positive performance in the first half of the year,despite the impact of war-related disruptions and a severe energy shock.It followed a sharp rebound( 11.7%)in 2021 after the sharp decline(-10%)in 2020 due to the pandemic.201820192020202120222023202420252026-30-20-10010203080859095100105110115120125130%-changeIndex 2021=100EU Mechanical Engineering SectorProduction Activity-forecast from Q2-2025Production index(left axis)Year-on-year change(right axis)economic and steel market outlook 2025-2026third quarter report22STEEL TUBE INDUSTRYACTIVITY IN THE FIRST QUARTER OF 2025In the first quarter of 2025,output in the steel tube sector dropped for the fifth consecutive time(-3%,after-1.8%in the preceding quarter).The positive trend in the sector,driven by the post-pandemic recovery in 2021,was abruptly interrupted by war-related disruptions and supply chain issues in the second half of 2022,and this situation has persisted to date.Uncertainty about energy prices following the 2022 summer energy shock despite a continued decrease in gas and oil prices driven by weak global growth prospects and subdued energy demand has persisted over the past three years.Together with broader economic uncertainty,this has significantly affected investment in the sector,including pipeline projects in the EU.FORECAST 2025-2026In 2023,output in the EU steel tube sector experienced a mild recession(-1.3%),followed by another,slightly more severe drop(-2.5%,revised from-3.2%)in 2024.Marginal recovery is expected in 2025( 0.1%,down from previously projected 0.9%)as well as in 2026( 0.7%).In the longer term,demand for large welded tubes from the oil and gas sector is not expected to improve substantially as the EU has accelerated its transition towards LNG shipping for its energy needs,thereby reducing its reliance on gas transported via pipelines.On one hand,global oil demand is not expected to boost the launch or the implementation of new pipelines in the short-term,due to high geopolitical uncertainty and a poor global economic outlook.Oil demand is expected to keep declining throughout the rest of 2025 in the EU,aligning with low economic growth expectations.On the other hand,demand from the construction sector is also set to ease and thus provide a modest contribution to growth in output,whereas tube demand from the automotive and engineering sectors is forecast to remain relatively stronger.PAST TRENDSIn 2022 the sectors output grew only moderately( 0.8%),after the rebound seen in 2021( 12%).In 2020,output in the EU steel tube industry was heavily impacted by the industrial shutdown due to the pandemic.Likewise for other steel-using sectors,the rebound seen during 2021 eased considerably throughout 2022 and turned into recession in 2023 as a result of severe global supply chain issues and the disruptions linked to Russias war in Ukraine.These factors have further delayed ongoing projects and impacted the availability of materials.201820192020202120222023202420252026-35-25-15-551525355060708090100110120130140150%-changeIndex 2021=100Steel TubesProduction Activity-forecast from Q2-2025Production index(left axis)Year-on-year change(right axis)economic and steel market outlook 2025-2026third quarter report23ELECTRIC DOMESTIC APPLIANCESACTIVITY IN THE FIRST QUARTER OF 2025In the first quarter of 2025,output in the electrical domestic appliances finally rebounded,albeit moderately( 1.1%),after four consecutive quarterly contractions.Output figures in the last three years have essentially shown a declining trend started in the second quarter of 2021,which marked the end of a bigger-than-expected post-COVID recovery in output.With the exception of another marginal drop which is expected in the second quarter of 2025,this negative trend is expected to reverse in the coming quarters.FORECAST 2025-2026Output in the domestic appliances sector recorded three consecutive recessions in 2022(-4.6%),2023(-4.1%),and 2024(-4.9%).Moderate recovery is foreseen in 2025 and 2026( 0.9%and 1.1%,respectively).Continued growth in output is expected from the third quarter of 2025 to end-2026.The protracted weakness of the manufacturing sectors and the subdued economic outlook have continued to hinder industrial activity and dampen consumer demand throughout 2024,and are expected also to do so in the first half of 2025.In the longer-term,however,some supportive factors are likely to partly offset these downside factors and provide incentives for growth.Remote working will remain widely practiced across the EU in the next years,albeit to a much lesser extent than during the pandemic.Developments linked to the so-called Internet of Things(smart applications that enable the connection of home appliances and devices)should also benefit the sector,although their impact is not likely to be visible before end-2025.PAST TRENDSWidespread remote working across the EU boosted demand for home appliances and other related goods over the second half of 2020 and the first half of 2021,but afterwards the sector cycle has considerably eased.This was due to multiple downside factors such as gradual return to offices after the pandemic,supply chain issues,rising energy costs,the war in Ukraine and the deterioration in the EU industrial outlook that has been seen since the first half of 2023.201820192020202120222023202420252026-30-20-10010203040707580859095100105110115120%-changeIndex 2021=100Electric Domestic AppliancesProduction Activity-forecast from Q2-2025Production index(left axis)Year-on-year change(right axis)24EU ECONOMICOUTLOOK 2025-2026GDP GROWTH TThanks to a higher-than-expected resilience of the economy and positive contribution from the services sector,the EU economy avoided recession in 2023 and 2024,albeit achieving much lower growth than in 2022( 0.6%in 2023 and 0.9%in 2024,vs. 3.6%in 2022).This resulted from multiple downside factors,namely historically high inflation(albeit on a downwards path since 2023)and subsequent monetary tightening up to mid-2024,war-related uncertainty and geopolitical tensions,high energy and commodity prices,all factors weighing on business investment.EUROFERs EU GDP growth forecasts for 2025 have been upped marginally compared to the previous outlook( 1.1%,from 1%)while slightly revised downwards for 2026( 1.3%,formerly 1.4%).Overall uncertainty has dominated the economic landscape throughout 2024 and 2025,largely driven by high-risk factors,particularly overall trade tensions and recent U.S.tariffs(announced or already implemented).As a result of uncertainty-driven low business and manufacturing activity and confidence despite substantial monetary easing implemented by the ECB with eight consecutive policy rate cuts since June 2024-EU economic growth continues to be primarily driven by the services sector,whereas the contribution to GDP growth from industrial sectors remains very low.Growth remains uneven across EU countries and continues to face multiple downside risks.The ongoing war in Ukraine,uncertainty surrounding inflation albeit slowing down almost to the 2%target-and conflicts in the Middle East,are likely to weigh on economic confidence,along economic and steel market outlook 2025-2026third quarter reportwith growing concerns related to the impact of U.S.tariffs.However,a so-called soft landing-a combination of low inflation and no economic recession-has materialised in the whole EU in both 2023 and 2024,and is likely to repeat in 2025.The impact of the above downside factors has proven asymmetrical across EU individual economies.Germany experienced a mild recession in 2023(-0.3%)and in 2024(-0.2%),due to protracted weakness of its manufacturing sector,and marginal GDP growth is projected for 2025( 0.2%)before a moderate recovery in 2026( 0.8%).Austria,Estonia,Latvia and Finland also faced recession in 2024(-1%,-0.3%,-0.4%,and-0.1%,respectively),but are all set to recover in2025,and to achieve stronger growth in 2026.As for France and Italy,real GDP growth in 2024 was above the EU average for the former( 1.1%)and below for the latter( 0.7%),and their economies are set to grow also in 2025( 0.6ch)before both gaining some speed in 2026( 0.7%and 0.8%,respectively).Spain has recorded a morepronounced GDP growth than the EU average in 2023 and 2024( 2.7%and 3%),which is also expected to be seen in 2025 and 2026( 2.5%and 1.8%,respectively).The latest European Commission forecasts(May 2025)foresee real GDP growth( 1.1%)for the EU in 2025,0.4 p.p.lower than the previous ones released in November 2024,before the new U.S.tariff policy,and therefore do not yet factor in the impact of new US tariffs and escalating global trade tensions.Growth is then set to gain some speed in 2026( 1.5%).Germany is expected to economic and steel market outlook 2025-2026third quarter report25achieve flat growth in 2025 before going back to growth in 2026( 1.1%).Despite continued global tariff-related tensions,the latest IMF World Economic Outlook(July 2025)has slightly upped its growth predictions,forecasting global GDP growth at 3%in 2025(previous outlook 2.5%)and 3.1%in 2026(formerly 3%).For the euro area,growth is projected at 1%and 1.2%respectively.As regards Germany,the IMF predicts tiny growth in 2025( 0.1%,formerly flat)and 0.9%in 2026.The OECD,in its latest Economic Outlook(July 2025),estimates euro area GDP growth to be 1%in 2025 and 1.2%in 2026.It also forecasts for Germany a GDP growth of 0.4%in 2025(0.3 percentage points higher than the previous outlook)and 0.9%in 2026(formerly 1.2%).As in the past years,services are expected to continue to provide the primary contribution to GDP growth also in 2025,whereas manufacturing is expected to remain weak,contrary to the post-pandemic rebound experienced in 2021 and up to the first quarter of 2022.Trade disruptions are expected to persist as a result of the Trump Administrations tariff policy,which has fuelled global uncertainty and weighed on global GDP growth prospects.Available estimates by the ECB suggest that the full implementation of the announced U.S.tariff measures may subtract 0.3 p.p.from euro area GDP growth in 2025.MAJOR EU ECONOMIESIn the second quarter of 2025,the EU economy continued to follow the weak growth trend observed in the first quarter( 0.5%)with a quarter-on-quarter increase of 0.2%in real GDP.On a year-on-year basis,the EUs real GDP growth was 1.5%( 1.6%in the first quarter).Despite the weakness of its manufacturing sector,the German economy avoided a technical recession between the first and the second quarters of 2025,but in the second quarter of 2025 real GDP contracted quarter-on-quarter(-0.3%,after 0.3%in the preceding quarter),albeit resulting in an increase of 0.4%year-on-year,signalling persistently subdued conditions.These low GDP figures stem from continued uncertainty over trade and rising global tensions,which are affecting its manufacturing sector,especially the automotive industry.As seen in previous quarters,other major euro area economies had diverging developments in the second quarter of 2025.Spain achieved higher-than-average GDP growth( 0.7%quarter-on-quarter,and 2.8%year-on-year).France recorded minimal real GDP growth( 0.3%),bringing year-on-year growth to 0.7%,whereas Italys real GDP contracted slightly(-0.1%),resulting in year-on-year growth of 0.4%.In line with the latest leading indicators,which continue to signal weakness in the manufacturing sector(see confidence indicators on page 26),it appears unlikely that EU economies will see growth gaining speed in the second half of 2025,as the economic outlook remains very uncertain with a fragile growth conditional upon several downside factors.Among them,energy prices,war-led uncertainty(Ukraine,Middle East),the implementation of U.S.tariffs and the related trade disruptions.ENERGY PRICESDuring 2025,energy prices have generally been cooling,particularly the Dutch TTF gas price index,which had reached a three-year peak in January,exceeding the threshold of 50 per MWh,before stabilising around 30 per MWh since April.This decline has largely reflected weak energy demand due to subdued manufacturing activity and overall economic uncertainty.Earlier rises in the gas price index were driven by higher demand expectations following a colder-than-expected winter,despite reduced industrial consumption amid the economic slowdown and lower electricity generation from wind power and other renewables.The ongoing transition from Russian pipeline gas to shipborne liquefied natural gas(LNG)from other suppliers,mainly the U.S.,continues.The ongoing war in Ukraine economic and steel market outlook 2025-2026third quarter report26and the tensions in the Middle East,along with other global geopolitical downside factors,have not so far triggered increases in gas and oil prices,due to weak energy demand and subdued global economic activity.However,uncertainty over future developments in energy prices remains.INFLATIONInflation reached highs unseen since 1985 in the EU in October 2022,peaking at 11.5%,before easing considerably since then(2.3%in June 2025;2%in the euro area in July).Among major EU economies,in July 2025 inflation stood below the 2B target in Germany(1.8%),France(0.9%)and Italy(1.7%),but was accelerating in Spain(2.7%).In the rest of the EU,it remained below the 2%target in addition to the largest EU economies-only in Ireland.Since the energy shock in the summer of 2022,energy inflation has slowed down remarkably(from 41%in June 2022 to-1.8%in June 2025).Yet,core inflation remains relatively high(2.5%in June 2025).Prices are expected to see moderate developments also in 2025,despite potential inflation-igniting factors still on the background.EUROFER estimates an inflation rate of 2%in 2025(2.3%in 2024)before reaching 1.7%in 2026,below the 2B inflation target(the European Commissions May 2025 forecast predicts 2.3%and 1.9%in 2025 and 2026,respectively).MONETARY POLICYDue to the highest inflation rate over the last 35 years,the ECB raised its policy rate from zero up to 4.50%from July 2022 to September 2023.This has inevitably reduced the room for supportive fiscal policies,in particular government spending by EU member states,as borrowing costs increased,especially for highly-indebted economies.Thanks to continued moderation in inflation in the course of 2023 and 2024,the ECB has implemented eight-broadly expected-25 basis points cuts in between September 2024 and June 2025,bringing its policy rate(i.e.the deposit facility rate)to 2.00%.Further reductions are possible depending on price developments,as part of efforts to provide expansionary stimulus to the economy.However,these remain largely unpredictable,since key price-driving factors(primarily energy prices and rising trade tensions)are likely to pass through higher import costs to consumers and cannot be ruled out.economic and steel market outlook 2025-2026third quarter report27area manufacturers,rose to a three-year high of 49.8 in July,from 49.5 in June,indicating a near-stabilisation of operating conditions across the euro area goods-producing sectors.GLOBAL SUPPLY CHAIN PRESSURE INDEX(GSCPI)In 2024,global supply chain conditions,which largely affect trade and transportation costs,have continued to reflect softening global demand and uncertain economic growth.The Global Supply Chain Pressure Index(GSCPI),which had peaked to 4.35 in July 2021 due to global supply chain disruptions,dropped to 0.07 in July,further down from 0.14 in June.Concerns about freight accessibility due to the ongoing conflicts and tensions in the Middle East have had relatively little impact so far,but escalating trade tensions and its possible repercussions on the global supply chain of goods(mainly due to higher production and transport costs)may reverse this trend in the coming months.CONFIDENCE AND LEADING INDICATORSECONOMIC SENTIMENT INDICATOR(ESI)Overall economic confidence in the EU,measured by the Economic Sentiment Indicator(ESI),has been on a downward path since early 2022 due to widespread concerns over war-related issues,high inflation and deteriorating economic outlook.In July 2022,it reached the lowest level since October 2013 at 92.6,and has consistently been lingering near the lowest levels observed since the second half of 2013,standing at 95.3 in July 2025.The HCOB Eurozone PMI index for the entire economy rose to 50.9 in July,from 50.6 in June,signalling an accelerated expansion in output,although the rate of growth was only marginal.In particular,the HCOB Eurozone Manufacturing PMI,a measure of the overall health of euro economic and steel market outlook 2025-2026third quarter report28EU INDUSTRIAL PRODUCTIONEU industrial production showed signs of weakness throughout 2024 and into the most recent 2025 monthly data.This trend persisted in most individual economies up to the second quarter of 2025.Across the EU as a whole,however,manufacturing output grew year-on-year for the second consecutive quarter( 1.1%,after 1%in the preceding quarter).Among major EU economies,Spain saw a recovery in manufacturing output( 1%),following a decline in the previous quarter(-0.8%,the first drop since the fourth quarter of 2023).Germany continued to experience severe industrial recession(-2.4%,unchanged from the first quarter of 2025).Similarly,Italy recorded its ninth consecutive quarterly decrease(-2.3%,after-2.9%in the preceding quarter)whereas France posted marginal growth( 0.2%)after three consecutive quarterly declines(-1%in the preceding quarter).The latest available monthly data(up to June 2025)indicates that output levels still remain below the all-time highs recorded before the pandemic in some major EU economies.Industrial output in Spain and France has returned back to pre-pandemic level,but this is not yet the case for Germany and Italy.Industrial output is expected to remain affected by a combination of factors.These include the uncertainty associated with escalating trade tensions related to the U.S.tariff policy,ongoing conflicts and geopolitical tensions,future developments in inflation and interest rates as well as in energy prices,which are still not entirely predictable.The EU experienced a pronounced drop in industrial production(-8.1%)in 2020,followed by a vigorous rebound in 2021( 8.2%),and achieved more moderate but resilient growth in 2022( 1.5%).However,in 2023 industrial output dropped(-1.7%)due to continued downside factors,especially high production costs and overall manufacturing weakness.Subsequently,another drop was recorded in 2024(-2.2%),expected to be followed by almost flat growth in 2025( 0.1%,formerly 0.3%),before gaining some ground in 2026( 1.4%).EUROFER Macroeconomic data,EUAnnual%change,unless otherwise indicated20222023202420252026GDP3.60.50.91.11.3Private Consumption5.10.61.11.41.6Government Consumption1.81.72.92.01.1Investment2.51.7-0.50.71.3Investment in mach.equip.2.92.6-1.9-0.11.6Investment in construction0.61.3-0.90.71.5Exports7.3-0.30.20.51.4Imports8.6-1.70.01.62.0Unemployment rate(level)6.56.36.25.95.9Inflation8.36.42.32.01.7Industrial Production1.5-1.7-2.20.11.4economic and steel market outlook 2025-2026third quarter report29GLOSSARY OF TERMSBUILDING AND CIVIL ENGINEERING41424325.125.2Construction of buildingsCivil engineeringSpecialised construction activitiesManufacture of metal structures and parts of structuresManufacture of tanks,generators,radiators,boilersMECHANICAL ENGINEERING2827.125.3Manufacture of machinery and equipmentManufacture of electric motors,generators,transformersManufacture of steam generators,except central heating hot water boilersAUTOMOTIVE29Manufacture of motor vehicles and trailersDOMESTIC APPLIANCES27.51Manufacture of electric domestic appliancesOTHER TRANSPORT EQUIPMENT3030.125.330.91Manufacture of other transport equipmentBuilding and repair of shipsManufacture of railway locomotives and rolling stockManufacture of motorcyclesSTEEL TUBES24.2Manufacture of steel tubesMETAL GOODS25Manufacture of fabricated metal products excluding 25.1-25.2-25.3OTHER SECTORS2627Manufacture of computer,electronic and optical productsManufacture of electric motors,generators,transformers,electricity distribution and control apparatus excluding 27.1 and 27.5SECTOR DEFINITIONS ACCORDING TO NACE REV.2economic and steel market outlook 2025-2026third quarter report30EU STEEL MARKET DEFINITIONSSWIP:abbreviation for Steel Weighted Industrial Production index.It is used as a proxy for real steel consumption.Activity in the steel-using sectors is weighted with the relative share of each sector in total steel consumed by all sectors.Real steel consumption:Real consumption is the use of all steel products used by steel-using sectors in their production processes,also referred to as the final use of steel products,adjusted for the stock cycle.Apparent steel consumption:Apparent consumption is also referred to as steel demand.It is total deliveries of all steel products and qualities by EU producers plus imports less receipts into the EU,minus exports to third countries.In other words,apparent consumption is deliveries by EU producers plus imports minus receipts(that is,imports by EU producers themselves of material that is further processed),minus exports to third countries.EUROFERs definition of apparent consumption includes all qualities,including stainless,and all finished products and semi-finished products.If apparent consumption exceeds real steel consumption,the surplus is stocked in the distribution chain.If apparent consumption is less than real steel consumption,inventories are being withdrawn.Steel industry receipts:In both the apparent consumption and market supply statistics,the imports component of the calculation is written,in the EUROFER definition,as imports less receipts.The receipts in this instance mean imports by EU producers themselves of finished or semi-finished steel products that are further processed by the producer and transformed into other products.In the publicly available EUROFER figures,only finished products are shown and thus impacted by the receipts calculation.This correction is important because it prevents double-counting that would artificially inflate the size of the market.If an EU producer imports a tonne of hot rolled strip that it further processes into a tonne of cold rolled which it then delivers to the EU market-in an uncorrected calculation the import of one tonne would then become one imported tonne plus one EU-processed and delivered tonne.The imported tonne is thus corrected out in the import side of the market supply and apparent consumption figures.Narrow definition:EUROFER applies the so-called“narrow definition”which excludes steel tubes and first transformation products from the product scope used for calculating steel consumption.Hence,the steel tube sector is a steel-using sector under this definition.Steel intensity:the ratio of real steel consumption to steel weighted production in the steel-using sectors.This reflects the usually slightly negative impact on consumption of innovation in steel products,inter-material substitution,improvements in process efficiency and design,etc.ABOUT THE EUROPEAN STEEL ASSOCIATION(EUROFER)EUROFER AISBL is located in Brussels and was founded in 1976.It represents the entirety of steel production in the European Union.EUROFER full members are steel companies and national steel federations throughout the EU.The major steel companies and national steel federations of Turkey,Ukraine and the United Kingdom are also members.The European Steel Association is recorded in the EU transparency register:93038071152-83.VAT:BE0675653894.The RLE or RPM is Brussels.ABOUT THE EUROPEAN STEEL INDUSTRYThe European steel industry is a world leader in innovation and environmental sustainability.It has a turnover of around 215 billion and directly employs 298,000 highly-skilled people,producing on average 146 million tonnes of steel per year.More than 500 steel production sites across 22 EU Member States provide direct and indirect employment to millions more European citizens.Closely integrated with Europes manufacturing and construction industries,steel is the backbone for development,growth and employment in Europe.Steel is the most versatile industrial material in the world.The thousands of different grades and types of steel developed by the industry make the modern world possible.Steel is 100%recyclable and therefore is a fundamental part of the circular economy.As a basic engineering material,steel is also an essential factor in the development and deployment of innovative,CO2-mitigating technologies,improving resource efficiency and fostering sustainable development in Europe.EUROFER ASBLAvenue de Cortenbergh,172B-1000 Brussels 32(2)738 79 20Economic Report contact:a.sciamarellieurofer.euwww.eurofer.euFollow us on X EUROFER_euThe European Steel Association is recorded in the EU transparency register:93038071 152-83.VAT:BE0675653894.The RLE or RPM is Brussels
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