Eurozone business confidence unexpectedly declined in February amid new political and economic uncertainties between Europe and the United States. The European Commission reported on Thursday that its Economic Sentiment Indicator fell to 98.3 for the month, down from a downwardly revised 99.3 in January. The index measures sentiment across multiple sectors of the economy as well as among consumers. The reading came in below analysts’ average forecast of 99.8 and remains under the indicator’s long-term average of 100.

Although Eurozone confidence started the year on a strong note, renewed trade disruptions this month have dampened sentiment. The outlook may darken further. Responses for the ESI survey were recorded before February 20, the day the U.S. Supreme Court rejected President Trump’s global tariff agenda. The U.S. administration responded by imposing broad 10% global tariffs, while European lawmakers paused deliberations on a trade deal with the U.S., adding further uncertainty to sentiment across the Eurozone.

However, Franziska Palmas, senior Europe economist at Capital Economics, noted in a report that February’s survey still suggests the Eurozone economy is expanding at a solid pace. She stated, “While renewed uncertainty over U.S. tariffs is not good news, we do not think it will significantly affect economic activity this year.”

Although business confidence had initially recovered from a series of shocks—including Russia’s full-scale invasion of Ukraine and the U.S. shift toward protectionism—signs of caution persist. The European Central Bank reported on Thursday that the annual growth rate of bank lending to businesses slowed to 2.8% in January, down from 3% in December.

In remarks to lawmakers on Thursday, ECB President Christine Lagarde said exporters continue to face greater difficulty finding overseas buyers, partly due to unpredictable U.S. policies. Surveys also indicated that employment expectations in the Eurozone fell in February, signaling a gradual cooling of the labor market and a potential easing of wage-price pressures.

The central bank has reiterated that it remains “in a favorable position,” expecting inflation to fall toward the 2% target over the medium term. Still, Lagarde warned that public perception of prices remains higher than official data suggest, posing downside risks to consumer morale.

Recent Purchasing Managers’ Index data showed business activity picked up in February even as confidence declined. This was driven by a rebound in manufacturing, as government stimulus measures in Germany—the Eurozone’s largest economy—began to feed through.

Palmas commented, “Overall, the relative strength in the ESI and service sector price pressures will reinforce the view among ECB officials that interest rates are ‘in a favorable position.’ But we still believe labor market weakness means risks lean toward rate cuts later this year.”