The deteriorating trade picture will be a major obstacle to the recovery of the European economy...
The eurozone economy in 2025 could see growth lower than recently expected, and this revised outlook is still optimistic if exporting businesses in the region have to face higher tariffs in the U.S. market - according to new forecasts from the European Union (EU).
The forecast suggests that the economy of the 20 countries using the euro will only achieve a growth of 1.3% next year, lower than the previous forecast of 1.4%. The European Commission's (EC) autumn economic report, the EU's executive body, also noted that the eurozone will achieve a GDP growth rate of 0.8% this year, unchanged from the previous forecast.
All major economies in the eurozone are expected to maintain stable growth rates in 2025, even though France is facing many political and fiscal challenges, while Germany's economy may decline this year. Spain is forecasted to outperform, with growth potentially reaching 3% this year and 2.3% in 2025.
However, the worsening trade picture will be a major obstacle to the recovery of the European economy - according to the EC. The protectionist trend of the U.S. during President Donald Trump's second term will be 'extremely harmful' to the economies on both sides of the Atlantic, EU Economic Commissioner Paolo Gentiloni stated on Friday. He said Brussels will work with the new government in Washington, but is also ready to defend itself in any trade war.
Extreme weather due to climate change is also a threat to the European economy - according to the EC. The agency referred to the severe flooding that resulted in hundreds of deaths in coastal areas of Spain recently. 'Damage to infrastructure in the affected areas also leads to broader impacts on production networks beyond borders. Additionally, disruptions to economic activities could increase inflationary pressures, especially food prices,' the report stated.
In recent years, inflation has been a major concern for European policymakers. The EC forecasts that the average inflation rate of the eurozone will be 2.4% in 2024 and 2.1% in 2025, compared to previous forecasts of 2.5% and 2.1% respectively. These forecast figures are close to the 2% inflation target set by the European Central Bank (ECB), but have not yet truly achieved that target.
Lower economic growth means lower budget revenue, causing additional stress on the budgets of EU member states. The EC stated that high budget deficits and increased public debt interest will cause the ratio of public debt to GDP to continue to rise.
The EC warns that the new French government faces a tough battle to reduce the budget deficit, which is currently much higher than the limits set by the EU. The EC predicts that France's budget deficit will decrease to 5.3% of GDP next year from 6.4% this year, but may slightly rise again in 2026 when some temporary tax measures expire. The EC also forecasts that France's government debt will increase significantly in the coming years.
The bleak outlook for growth and inflation could pave the way for the ECB to continue lowering interest rates, although at a gradual pace. This is the first economic forecast from the EC since May, and currently, the ECB has begun a cycle of rate cuts, reducing the deposit rate from 4% to 3.25% - the rate that had been maintained since September last year until the first cut in July this year. The ECB has signaled that it will continue to cut rates to alleviate some burdens on investment and other economic activities.
The President of the German Central Bank (Bundesbank) Joachim Nagel warned last week that if implemented, Trump's tariff plan could cause Germany to lose about 1% of GDP. The effects of these tariffs could be particularly felt across the entire industrial sector of the euro area, with smaller suppliers likely to suffer the most.
According to forecasts from insurance company Allianz, Germany's export volume worth nearly 25 billion euros will be at risk in the event of a full-scale trade war between the U.S. and Europe next year. Additionally, exports from France and Italy will also be heavily affected.
However, economists are still divided on the potential impacts of the tariff plan proposed by Trump. Some even argue that a stronger USD could overshadow the negative impacts of tariffs, thereby boosting U.S. demand for European goods.