Tariffs and defence spending: S&P Global slashes eurozone and UK growth forecast
Uncertainty round US commerce tariffs is costing the eurozone and the UK economic system billions this 12 months and the subsequent, which can’t be totally offset by elevated defence spending in 2025.
Financial uncertainty is about to scale back the eurozone economic system, value €14.6 trillion, by a cumulative 0.4% of GDP over 2025 to 2026, in line with S&P International’s newest report.
In its newest financial forecast, penned earlier than the 25% tariffs on US automotive imports had been introduced, S&P International additionally lowered its earlier expectations for the eurozone from 1.2% to 0.9% for 2025 as a result of this uncertainty.
Chief EMEA Economist Sylvain Broyer instructed Euronews Enterprise that “uncertainty itself is prone to pose a larger danger to the European economic system than the tariffs alone”.
However, there are inexperienced shoots of hope in Europe. Attributable to fiscal stimulus in Germany and the EU, GDP may develop by 1.4% in 2026.
To what extent may US tariffs hurt European restoration?
Broyer, emphasising that his forecast may change as a result of unpredictable coverage strikes forward, sketched up numerous situations to see the impact of potential tariffs on the bloc’s economic system.
Within the worst case state of affairs, a rise in US tariffs on all EU imports to 25% would restrict GDP progress within the eurozone to 0.5% in 2025 and 1.2% in 2026. On this case, he predicts that the ECB would minimize rates of interest greater than as soon as this 12 months and lift them later than consultants presently predict.
Commenting on the White Home’s newest bulletins, promising 25% tariffs on all vehicles and automotive elements, Broyer stated to Euronews Enterprise that their forecast had already considered a ten% tariff of this nature. He added that a further 15% would have a restricted impact on the present figures.
“Germany can be extra considerably impacted than the broader eurozone, given its greater reliance on US automotive exports — roughly 1.5 instances the European common,” Broyer stated, including that it could decrease German output by 0.1% for 2025.
On a extra optimistic observe, confidence in Europe is climbing, supported by falling rates of interest and inflation, yielding continued power for the labour market. The anticipated fiscal stimulus, particularly within the defence sector, is additional boosting confidence.
EU member states will seemingly comply with a rise in defence spending by 1% of GDP from 2026, which may enhance eurozone GDP by 0.1% in 2026, 0.2% in 2027, and 0.3% in 2028.
A probable charge hike from the ECB is on the horizon
As potential EU retaliatory tariffs didn’t appear to considerably enhance inflation within the bloc on the time of finalising the report, S&P International forecast that the ECB would minimize charges yet another time this 12 months—to 2.25% in April or June.
S&P International expects that the ECB will begin elevating its key rate of interest within the second half of 2026, with two hikes anticipated, till the deposit facility charge reaches 2.75% by the top of subsequent 12 months. It expects a robust restoration in credit score demand and steered that fiscal stimulus will push the economic system to an unsustainable charge of progress.
Broyer wrote that the dangers to the present forecast embrace commerce uncertainty, potential failure to execute fiscal plans, and spillovers from the US economic system if progress throughout the Atlantic is hit by greater import costs.
On the flip facet, fiscal stimulus applications may have a greater-than-expected influence and enhance confidence quickly.
UK progress prospects practically halved
In one other financial forecast targeted on the UK, which arrived earlier than the automotive tariff announcement, S&P International slashed its expectations concerning the progress of the British economic system to 0.8% from 1.5%. The virtually halving of the forecast may be defined by excessive inflation, weak export volumes, and tight financial coverage. The UK’s GDP expanded by 1.1% in 2024, in line with the statistics workplace.
If the UK can’t wiggle its method out of the newly introduced 25% tariffs on automotive exports to the US, this might end in a 0.2% hit to GDP, in line with Marion Amiot, Chief UK Economist at S&P International Scores.
“Automobile exports to the US are the biggest supply of bilateral items commerce surplus for the UK,” she stated.
Uncertainty round commerce, weak demand in Europe and China, and the sturdy worth of the pound are limiting the nation’s exports, which offered 31% of the nation’s GDP in 2024. Weak export progress can also be as a result of elevated labour and vitality prices for firms.
“The vitality costs are nonetheless twice as excessive as we speak as they had been earlier than the vitality disaster, so there are a whole lot of issues they’ve to soak up,” Amiot instructed Euronews Enterprise.
One section that may anticipate accelerating demand in the mean time is defence. Because the UK is the fourth largest defence exporter in Europe, it may probably profit from elevated EU navy spending within the coming years.
“It is not fairly clear what the partnership will seem like sooner or later, however there appears to be willingness to cooperate on defence, regardless that we noticed that a number of the EU spending is prone to exclude UK corporations,” Amiot stated.
What’s the Financial institution of England’s subsequent transfer?
Because the UK authorities has left itself little or no fiscal room to manoeuvre, there’s uncertainty as as to if the state will elevate taxes—significantly as the price of servicing debt has risen.
“Corporations and households are prone to anticipate extra tax will increase or some additional cuts to the welfare invoice. So this does not put companies and households in place to confidently make investments or spend,” Amiot stated.
In the meantime, sustained wage progress shut to six% in December is fuelling inflation, placing the central financial institution in a tough place as progress stays weak.
Inflationary pressures are tying the policymakers’ palms as they continue to be cautious about reducing, whereas buyers are hungry for decrease charges.
The Financial institution of England stored its benchmark rate of interest steady at 4.5% at its newest financial coverage assembly. The most recent inflation determine, 2.8% for February, fuelled hopes of a minimize, however the majority of the analysts agreed that costs would rise sharply within the coming months.
In its forecast, S&P International expects the Financial institution of England to chop charges to 4% by the top of the third quarter in 2025. They nonetheless anticipate one much less charge minimize than of their earlier forecast, anticipating extra cussed inflation.
In 2026, progress is anticipated to speed up, with the report predicting a 1.6% improve in financial output.
“Issues are trying up for 2026, with regional progress choosing up, charges minimize by one other 50bp, and inflation edging again to 2.5%,” learn the report.
