Donald Trump’s announcement of sweeping 20% tariffs on European exports has prompted economists to slash their eurozone progress forecasts, warning of a looming international slowdown with sharp regional fallout.
Consultants broadly agree that the tariff shock will weigh on consumption and funding, whereas inflation considerations are more likely to take a again seat as deteriorating progress dynamics dominate.
This shift strengthens the case for the European Central Financial institution (ECB) to speed up its rate-cutting cycle, with the chance of an April transfer more and more priced in.
Banks see rising stagnation dangers for eurozone amid tariff shock
ABN Amro economists, led by head of macro analysis Invoice Diviney, now count on a big slowdown in European financial exercise.
“The EU has been hit with a 20% tariff. We count on this to drive a pointy fall in exports to the US over the approaching months, and we’re considerably downgrading our 2025 progress forecast on the again of this,” the group mentioned.
Based on the Dutch financial institution, quarterly progress is predicted to stay near zero within the close to time period, with a powerful chance of contraction, though frontloading results might obscure the exact timing.
“We count on the bottom level for progress to happen within the third quarter,” Diviney mentioned. “A restoration ought to start in direction of the tip of the fourth quarter and achieve momentum in 2026.”
He added that any rebound will probably depend upon a number of mitigating components, together with the opportunity of partial tariff reduction from the US, commerce diversion to different markets, and authorities intervention if financial situations deteriorate sharply.
On inflation, ABN Amro anticipates the tariff shock and ensuing decline in international demand to extend the chance of inflation undershooting the ECB’s 2% goal, notably on account of downward stress on power costs.
Financial institution of America economists echoed these considerations, estimating the US tariffs may cut back international GDP progress by 50 foundation factors, with US GDP doubtlessly hit by as much as 1.5 share factors, and China and the euro space by round one share level and 40–60 foundation factors respectively.
“For the Euro Space, if tariffs are usually not decreased, this might simply take away 40–60bp of progress within the subsequent few quarters, together with some surgical retaliation on the EU facet,” Ruben Segura Cayuela mentioned.
Financial institution of America believes the inflationary results of retaliation by the EU can be comparatively negligible, estimating {that a} 10% rise in tariffs on US imports would elevate headline inflation by solely round 5 foundation factors, and core inflation by lower than 10 foundation factors.
“Finally, GDP progress losses would simply dominate that first-round impact,” Cayuela added.
The tariffs, he famous, additional solidify expectations for financial easing: “Tariffs improve even additional our conviction on an April lower.” The financial institution continues to forecast back-to-back price cuts, reaching a 1.5% deposit price by September.
Carsten Brzeski, international head of macro at ING, in contrast the tariff transfer to a “tsunami” that remembers the protectionism of the Thirties.
“A US 20% reciprocal tariff on the European Union will damage. It is worsened the eurozone’s short-term outlook,” he warned.
However the injury, Brzeski burdened, goes past commerce volumes.
“Consider the secondary results on confidence these tariffs will have already got on European shoppers and companies. Holding again consumption and investments seems probably. This might preserve financial progress within the eurozone at a snail’s tempo.”
ING has lowered its eurozone GDP forecast for 2025 to 0.6%, from 0.7%, and 2026 to 1.0%, from 1.4%.
Goldman Sachs’ European economics group, led by Sven Jari Stehn, sees mounting draw back dangers.
“Our baseline progress forecast of 0.8% in 2025 already assumed a complete trade-related GDP hit of 0.7%, and is under consensus and the March ECB employees projections,” they famous.
“As a result of the tariffs introduced had been bigger than anticipated elsewhere in Europe and Asia, and given the robust language from the US administration, the chance of escalating commerce tensions has elevated,” the group wrote, warning of a possible technical recession in a draw back situation.
Goldman’s inflation projections additionally face downward revisions, on account of a stronger euro and a probable disinflationary impulse from redirected commerce flows, particularly from Asia. The financial institution now sees additional justification for a sequence of ECB cuts, anticipating the deposit price to achieve 1.75% by July, and calling an April lower “very probably.”
