European officials on Monday sharply lowered their eurozone growth forecasts for this year, mainly due to global trade tensions triggered by U.S. President Donald Trump's sweeping tariffs and stagnating German economy.
The estimate for the 20 countries that use the euro currency was cut to 0.9% for end-2025 from the previous forecast in November of 1.3%, the European Union's executive commission said Monday in its regular spring forecast.
The European Commission cited "a weakening global trade outlook and higher trade policy uncertainty." The forecast for 2026 was cut to 1.4% from the 1.6% expected in November.
One reason for the lower growth estimate was the stagnating economy in Germany, where growth is expected to be zero this year after two years of shrinking output.
Germany's economy is heavily dependent on exports but has faced strong headwinds from higher energy costs after the loss of Russian natural gas due to the invasion of Ukraine as well as from a lack of pro-growth infrastructure spending and competition from China in autos and industrial machinery.
Trump has hit the European Union and others with 25% levies on steel, aluminium and auto imports, and the bloc faces sweeping additional tariffs unless it reaches a deal with Washington.
The U.S. leader announced a 20% levy on most EU goods in April, along with higher duties on dozens of other nations.
That measure has since been frozen until July to allow negotiations, but Trump has kept a "baseline" 10% tariff on imports from around the world, including the 27-country EU.
The proposal for the 20% U.S. tariff on imported goods from Europe, in addition to its suspension for 90 days, has meant uncertainty "not seen since the darkest days of the COVID-19 pandemic," said Economy Commissioner Valdis Dombrovskis.
Dombrovskis said the European economy remained "resilient" and that the jobs market remained robust, with the commission predicting a fall in unemployment to a record low of 5.7% next year.
And the risks to the outlook remain "tilted to the downside," he said. One reason: The forecast assumes that the proposed 20% rate can be reduced through negotiations with Washington to the base tariff rate imposed on all countries of 10%.
While the EU's top trade official, Maros Sefcovic, has spoken several times with administration officials, it remains uncertain how willing Trump might be to reduce the rate.
The forecast assumed that 25% tariffs on steel and autos from all countries will remain in place, as would exemptions on computer chips and pharmaceuticals.
The eurozone economy grew 0.3% in the first three months of the year, amid hopeful signs of a stronger upswing. But the mood was darkened just two days after the first quarter ended, when Trump on April 2 announced a slew of new, higher-than-expected tariffs.
The EU also said Germany, the bloc's biggest economy, would not grow at all in 2025, a significantly sharp reduction from the 0.7% predicted last year.
After a previous mandate focused on fighting climate change, the commission's focus has pivoted to competitiveness, seeking to make life for businesses easier in the face of fierce competition from Chinese and American firms.
Explaining the thinking behind Monday's forecast, the EU also pointed to the U.S.-China trade war, during which the two sides hiked levies on each other's goods before slashing them in a temporary de-escalation.
"The tariff rates eventually agreed by China and the U.S. on 12 May have turned out to be lower than those assumed, but still high enough not to invalidate the assumption of a hit to the U.S.-China trade relationship," the commission said.
Beyond trade tensions, the EU warned the greater frequency of climate-related disasters such as forest fires and floods risked hurting economic growth.
The commission said it expected inflation in the euro area to ease to 2.1%, unchanged from the previous prediction and very close to the European Central Bank's (ECB) 2% target.
Inflation among the 20 members of the eurozone has slowed down sharply from the double-digit highs seen in late 2022 and sat at 2.2% in April.
The EU cut its 2026 inflation forecast to 1.7%, from 1.9%.
Brussels warned further global trade tensions could "reignite inflationary pressures."
