Economics

Europe: US tariff policy postpones eurozone recovery

At 0.6%, real gross domestic product in the eurozone expanded more strongly than expected in the first quarter compared to the previous quarter. In addition to a sharp rise in investments, higher exports, in particular, contributed to the good result. The strong exports are probably due, in particular, to pull-forward effects as companies sought to preempt the threat of US tariffs.

The unpredictable US tariff policy is currently the main factor holding back the European economy. Negotiations between the US and the European Union (EU) have been slow in recent months. Most recently, Trump has once again significantly increased the pressure. He has doubled import tariffs on steel and aluminum to 50% and is also threatening to impose tariffs of 50% on all goods from the EU, which could come into force from 9 July. An escalating tariff dispute between the US and the EU would hit both sides hard. We therefore expect that at least a framework agreement will be reached soon. However, Trump is unlikely to withdraw his tariffs completely, so we expect the average additional US tariff on imports from the EU to end up at around 10%. This would mean that the duties that European companies would have to pay for imports into the US would be significantly higher than before Trump’s second term in office. However, an end to the planning uncertainty would stimulate the local economy. The fact that the European Central Bank (ECB) lowered the deposit rate for the eighth time since mid-2024 to 2.0% on 5 June is also having a positive effect. This monetary easing will have an increasingly positive impact on the real economy. Meanwhile, the labour market remains stable and rising fiscal spending, particularly in Germany, will provide an additional tailwind from the turn of the year. After a currently weaker economic phase, this is likely to help the eurozone to regain some momentum in the coming quarters.

Germany: New government must tackle reforms

The challenges facing the new federal government are manifold. They range from geopolitical threats to economic structural problems. The easing of the debt brake for additional expenditure in the areas of infrastructure and defence will help to overcome these challenges.

But money alone will not solve the problems. It will be important for the new government to present a united front and tackle reforms on the supply side in particular. In addition, care must be taken to ensure that the newly gained fiscal policy leeway is not used for consumptive expenditure, but that the additional funds flow into future-oriented investments. It will take until 2026 for the new funds to flow on a larger scale. However, they are then expected to enable the German economy to achieve growth rates of over 1% again after three years of stagnation.

US: Trump harms the USA more than other countries

While the US has reached an initial trade agreement with the UK and concluded a framework agreement with China, negotiations with the EU are progressing more slowly. Overall, the US economy still appears to be quite robust. However, the restrictive immigration policy under Trump and the protectionist trade policy are likely to significantly slow down growth in the US in the coming months. In view of the high level of uncertainty, companies are holding back on investments and consumer sentiment has also deteriorated recently. Precisely because the damage to the US could otherwise be so significant, we expect Trump to conclude trade agreements with the EU and other regions by mid-July and de-escalate the dispute with China in his own interests. Following the markets' negative reaction to the tariff shock on 2 April, he has suspended most additional tariffs for 90 days. He apparently does react when markets and companies show him the red card.