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The European Commission has cut its growth forecasts for the eurozone this year and next as a result of uncertainty caused by Donald Trump’s tariff wars.
The commission said the impact of tariffs demanded a “considerable downgrade” to the expected growth this year of the 20-member eurozone to 0.9% from the previous forecast, made in November, of 1.3%.
The commission’s spring forecast also reduced the extent of the eurozone recovery in 2026 to 1.4% from the November forecast of 1.6%.
Trump’s threat in April to impose a 20% tariff on imported goods from the EU, followed by its suspension for 90 days has given rise to a level of uncertainty “not seen since the darkest days of the Covid-19 pandemic”, said the economy commissioner, Valdis Dombrovskis.
He said the European economy remained resilient and the jobs market was robust, with the commission predicting a fall in unemployment to a record low 5.7% next year.
Germany is expected to be the biggest drag on growth in 2025, although the commission said zero growth in 2025 and 1.1% in 2026 would mean the EU’s largest economy would avoid a third consecutive year of contraction.
Germany’s economy has suffered from a lack of public investment and high energy costs after the Russian invasion of Ukraine. A sharp slowdown in exports to China has hit exports. Hopes of a recovery this year have been dashed by the prospect of German car and industrial goods losing sales after the increase in US tariffs.
Dombrovskis said risks of a further deterioration in Europe were “tilted to the downside”, although Trump is under pressure to reduce the impact of higher tariffs after the rating agency Moody’s stripped the US of its much-coveted triple-A credit rating last week.
The rating agencies S&P and Fitch had already downgraded the US, citing the hit to economic growth from higher tariffs and White House plans to cut taxes and increase defence spending expected in the autumn.
Hauke Siemssen, an interest rate strategist at Commerzbank, said: “While Moody’s is catching up with other rating agencies, the downgrade serves as a reminder of the mounting fiscal challenges [in the US].”
The impact of US tariffs is expected to be discussed at the G7 meeting of finance ministers and central bank governors in Banff, Canada, later this week, although there is not expected to be an agreement on the next steps.
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The Belgian central bank governor, Pierre Wunsch, told the Financial Times that the extra stress on the eurozone economy from tariffs could force the European Central Bank to cut interest rates to “slightly below” 2%.
The 10-year US Treasury bond rose to 4.54% on Monday. The equivalent bond sold by the German government attracts a yield of 2.60% and 3.63% for 10-year Italian bonds.
Underscoring the EU’s safe haven status, despite the downgrade to growth, the European Commission sold three-year bonds on Monday at an average yield, or interest rate, of 2.31%. A UK five-year bond on Monday was trading at a yield of 4.17%.
S&P Global said its survey of UK consumers found them to be nervous about spending because of “limited cash availability”. Its regular consumer sentiment survey of 1,500 households, which tracks their financial wellbeing, job prospects, savings and debt, rose from 44.5 in April to 45.2 in May, when a figure below 50 indicates contraction.
