Europe’s growth cut as Trump hits EU with 20% tariffs

Our initial estimates of the direct impact from the US decision to raise tariffs on imports from the EU and other countries shows it could shave 0.2ppts-0.3ppts off annual Eurozone GDP growth this year and next. But this does not include the impact that the associated trade uncertainty will have on investment, so we will likely cut our GDP growth forecast by more.

We don’t expect the EU to retaliate in full, but to opt instead for a targeted response. The EU still hopes to bring the US to the negotiating table from a relative position of strength and seems ready to respond firmly if it cannot achieve an agreement, including the use of its ample regulatory powers and other non-tariff measures.

The impact on inflation is highly uncertain at this time given several conflicting forces. Reciprocal tariffs will automatically raise prices, but European corporates have limited room to pass these on fully given the consequent hit to demand. Meanwhile, commodity prices have fallen in reaction to the tariff announcement, while a stronger euro will dampen imported inflation. On the other hand, the magnitude of the rise in tariffs on a global scale could damage supply chains, stoking inflationary pressures.

This means we will take a cautious approach to our monetary policy forecasts and keep to our current baseline projection of two additional cuts in April and June and then a pause after. We think the balance of risks currently tilts slightly towards more rate cuts, but we will adjust our views once the full impacts on growth and inflation are clearer in the data.