EU slashes growth forecasts over higher US tariffs, uncertainty

The European Commission on Monday sharply downgraded its economic growth outlook for the European Union, citing the impacts of higher US tariffs and persistent uncertainty.

In its Spring 2025 Economic Forecast, the commission cut its projections for real gross domestic product growth for the 27-country bloc to 1.1 percent in 2025 and 1.5 percent in 2026, down from 1.5 percent and 1.8 percent, respectively, in the Autumn 2024 Forecast.

"This represents a considerable downgrade compared to the Autumn 2024 Forecast, largely due to the impact of increased tariffs and the heightened uncertainty caused by the recent abrupt changes in US trade policy and the unpredictability of the tariffs' final configuration," the commission said.

The euro area, encompassing the 20 EU countries that share the single currency, is now expected to grow by 0.9 percent in 2025 and 1.4 percent in 2026, also below earlier estimates.

Inflation in the euro area is forecast to meet the European Central Bank's 2-percent target by mid-2025, sooner than previously expected, the Commission said. Headline inflation should ease from 2.4 percent in 2024 to 1.7 percent in 2026, with EU-wide inflation figures following a similar trajectory.

The Commission attributed the faster disinflation to the dampening effect of trade tensions outweighing upward pressure from food prices and short-term demand.

EU exports are projected to grow by just 0.7 percent this year while goods exports are set for a renewed contraction amid slower global growth, a sharper decline in world trade, weakened competitiveness within the bloc, and heightened trade uncertainty.

The Commission warned that risks remain tilted to the downside. Further fragmentation of global trade could shave off growth and rekindle inflationary pressures, while more frequent climate-related disasters pose an ongoing threat.

"An escalation of trade tensions between the EU and the US could depress GDP and rekindle inflationary pressures. Intensified trade tensions between the US and other major trading partners could also have ripple effects on the EU economy," the report said.

It also noted that stress in non-bank financial institutions could spill into banking, hampering credit flows. Persistent US inflation, possibly driven by tariff-induced supply shocks, might force the Federal Reserve to tighten policy again, leading to adverse spillovers on global financial conditions and EU external demand.