Europe’s Factories Boosted by Tariff Frontrunning as August Deadline Looms

Industrial production increased 1.7% in May as the eurozone partly rebounded from a tariff-induced slump.

Factory output in the eurozone partly rebounded from a tariff-induced slump in May, but trade is likely to remain a headwind even as manufacturers harbor hopes of better times on government pledges to increase defense and infrastructure spending.

Production in Germany rose 1.2% on month, helped by an uptick in its pharmaceutical sector, home to giants like aspirin-maker Bayer.

Industrial production increased 1.7% from April across the 20 nations that make up the eurozone, according to figures released by the European Union’s statistics agency on Tuesday. That was a faster rise than economists had expected, according to a poll conducted by The Wall Street Journal.

The increase reverses a sharp drop a month earlier, when the imposition of tariffs–since paused and reworked–led to a fall in demand for European goods. Earlier in the year, factory output had surged as U.S. firms rushed to stock up ahead of the anticipated tariffs.

The rebound in May is a sign of resilience in Europe’s manufacturing sector, which has suffered a series of blows over recent years. However, President Trump on Saturday threatened to raise the tariff for most European products to 30% from 10% on Aug. 1, which could lead to a fresh slowdown in factory activity. The EU’s top politician, Ursula von der Leyen, said the bloc would continue to work toward a deal with Washington, but that it is “ready to safeguard EU interests on the basis of proportionate countermeasures.”

Ahead of the threatened tariffs, front-running of orders looks to have been particularly steep in the pharmaceutical sector. Factory output recorded a strong rebound in May in Ireland, where pharma titans like Allergan and Pfizer manufacture popular drugs from Botox to Viagra.

The imposition of tariffs, and efforts by businesses on both sides of the Atlantic to manage their impact, has led to big swings in production of a number of goods. Non-durable consumer goods jumped 8.5% on the month, the largest increase since records began in 1991, having fallen sharply in April.

In Germany, Europe’s largest economy, production meanwhile rose 1.2% on month, helped by an uptick in its pharmaceutical sector, home to giants like aspirin-maker Bayer. The country’s auto factories also churned out more cars and trucks over the month.

Still, European manufacturing faces a downturn in the following months as the August tariff deadline looms. Brussels’s negotiators have repeatedly said they want to reach a deal with the Trump administration, but in the event the 30% duties are implemented, the hit to the economy could be severe. In Germany alone, economic output could be lowered by 0.7 percentage points, according to research from economists at Frankfurt-based Commerzbank.

German Chancellor Friedrich Merz told the broadcaster ARD on Sunday that Trump’s tariffs would hit the German export industry to the core, and vowed to work toward a solution.

A hit from tariffs would add to the travails that dogged European industry long before Trump returned to the White House.

China’s rapidly growing auto sector has sliced into demand for European cars. The Russia-Ukraine crisis sent energy bills soaring at the continent’s factories, while the sharp rise in interest rates used to combat the resulting spike in price inflation has depressed capital investment. Production levels in the eurozone are now barely higher than they were in the prepandemic period.

A glimmer of hope lies on the horizon for Europe’s factories, in the shape of a planned injection of hundreds of billions euros into military spending and infrastructure, both at the level of national governments and via EU-wide funding mechanisms.

French President Emmanuel Macron said at the weekend the government would bring forward to 2027 a target of doubling the country’s defense budget compared with 2017, entailing some 12 billion euros ($14 billion) in extra spending over the next couple of years. German premier Friedrich Merz has meanwhile broken with his country’s years of tight fiscal control by lifting a cap on military spending and promising an infrastructure investment fund of half a trillion euros.

Still, questions remain around the capacity of European industry to step up military production as fast as politicians would like. The defense industry is small in Europe, economist Marieke Blom at Dutch bank ING wrote in a recent research note.

“It will take time for it to scale up, which limits the economic upside as far as manufacturing is concerned,” she said.

Write to Joshua Kirby at joshua.kirby@wsj.com