EU Slashes Euro Zone Growth Forecasts Amid U.S. Trade War, Rising Economic Uncertainty
The European Commission has revised its euro zone economic growth forecast downward, citing the ongoing trade war initiated by the United States as a primary cause. The updated projections now estimate that euro zone GDP will grow by just 0.9% in 2025, a sharp drop from the previously forecasted 1.3% issued last November. The downgrade reflects the increasing uncertainty in global trade and the unresolved nature of escalating U.S.-EU trade tensions.
Looking ahead to 2026, the Commission projects a modest recovery, with GDP expected to rise by 1.4%. However, this figure also falls short of earlier predictions of 1.6%, highlighting persistent concerns over global trade dynamics. The forecast assumes that current U.S. tariff levels—10% on all EU goods and 25% on specific imports like steel, aluminium, and cars—will remain unchanged, further constraining economic optimism.
The Commission emphasized that the risks to economic growth remain skewed to the downside. Key concerns include further fragmentation of global trade, renewed inflationary pressures, and increasingly frequent climate-related disasters. These risks pose additional challenges for economic stability and growth, compounding the effects of trade policy uncertainty.
On the positive side, the Commission noted that growth could improve if trade tensions with the U.S. ease or if the EU successfully expands its trade relationships elsewhere. Additionally, increased defence spending across EU member states could provide a short-term boost to economic activity, potentially softening the blow of the current downturn.
Despite slower growth, the euro zone labor market is expected to remain resilient, with unemployment projected to fall to 6.1% by 2026. Inflation is also expected to moderate, declining to 2.1% this year and 1.7% by 2026. However, the region’s public finances are set to worsen slightly, with budget deficits and public debt ratios projected to rise modestly over the next two years, reflecting the broader strain on government
Source: Reuters