European Commission Lowers Growth Forecasts Amid Trump Tariff Uncertainty
The European Commission has revised its growth forecasts for the eurozone for 2023 and 2024, primarily due to the uncertainty stemming from Donald Trump's ongoing tariff wars. In its latest analysis, the commission adjusted its growth projection for the 20-member eurozone down to 0.9% this year, a marked decline from the previous November estimate of 1.3%. Furthermore, projections for 2026 have also been scaled back to 1.4% from an earlier forecast of 1.6%.
Economy Commissioner Valdis Dombrovskis noted that Trump's threats in April to impose a 20% tariff on imported goods from the EU—followed by a temporary suspension of this directive—have created a level of uncertainty that mirrors the financial climate experienced during the height of the Covid-19 pandemic.
Despite these challenges, Dombrovskis asserted that the European economy remains resilient, citing a robust job market where unemployment is expected to fall to a record low of 5.7% next year. However, Germany is projected to be the biggest drag on growth, with forecasts suggesting zero growth in 2025 and 1.1% in 2026. This indicates that Germany's economy will avoid a third consecutive year of contraction; yet, it reflects significant struggling due to inadequate public investment and escalating energy costs in the wake of the Russian invasion of Ukraine. The situation has also been compounded by a sharp decline in exports to China, severely affecting Germany's exports of cars and industrial goods amidst rising U.S. tariffs.
The European Commission warns that risks for further economic deterioration in Europe lean towards the downside. Trump's administration is currently under pressure to minimize the negative impacts of elevated tariffs, especially considering that Moody's has recently downgraded the U.S. credit rating—a decision that follows similar moves by SP Global and Fitch, who cite the adverse effects of higher tariffs and proposed tax cuts combined with increased defense spending.
Hauke Siemssen, an interest rate strategist at Commerzbank, commented that this downgrade by Moody's serves as a cautionary reminder of the growing fiscal challenges facing the U.S.
As discussions regarding the implications of U.S. tariffs are set to take place at the G7 meeting of finance ministers and central bank governors in Banff, Canada, consensus on forthcoming steps remains unlikely. Pierre Wunsch, the Belgian central bank governor, expressed concern over the potential strain on the eurozone economy from tariffs, suggesting that the European Central Bank might need to consider a reduction in interest rates to slightly below 2%.
Additionally, reflecting the EU’s status as a safe haven amidst economic turmoil, the European Commission successfully sold three-year bonds at an average yield of 2.31%. In contrast, 10-year U.S. Treasury bonds yielded 4.54%, while similar bonds from the German government yielded 2.60%, and 3.63% for 10-year Italian bonds.
In the UK, recent consumer sentiment surveys conducted by SP Global revealed increased apprehension among households regarding spending, driven by limited cash flow. The survey’s results, which involved responses from 1,500 participants, noted a rise in consumer sentiment from 44.5 in April to 45.2 in May—a figure still below the 50 mark that indicates economic contraction.
As Europe navigates through these turbulent times, the interplay of tariffs, economic policy, and financial forecasts will be closely monitored.
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