Tariff impact on exports! The European Union significantly lowers economic growth expectations

In the semi-annual economic outlook report, the European Union has significantly lowered its economic growth forecasts for this year and next due to the impact of increased tariffs from the United States on exports, while also expecting inflation to cool more rapidly.

On Tuesday, the European Commission projected that the GDP of the 20 Eurozone countries will grow by 0.9% this year and by 1.4% in 2026, down from previous forecasts of 1.3% and 1.6%.

The European Commission also revised down its export growth forecast for this year from the previous estimate of 2.2% to a sharp decline of 0.7%. This forecast assumes that the tariffs on most imports from the EU imposed by the U.S. will remain at 10%, rather than the higher levels announced by Trump on April 2.

Valdis Dombrovskis, a senior EU official responsible for economic affairs, stated:

The unpredictable and seemingly arbitrary reasons behind the U.S. tariff announcements have pushed economic uncertainty to its highest level since the darkest days of the pandemic.

Additionally, due to the slowdown in economic growth and rising government debt rates, the European Commission expects the budget deficit to be higher than previously predicted. The Commission raised its estimate of the combined deficit for the 20 Eurozone countries this year from 2.9% of GDP to 3.2%.

Although these figures do not include the planned increase in defense spending by European governments, higher defense spending is expected to stimulate economic growth. Dombrovskis noted that if defense spending increases the EU's economic output by 1.5%, the EU economy will be 0.5% higher than projected by 2028. However, government debt will also increase.

Inflation Expected to Cool Rapidly, ECB Rate Cut in June Almost Certain

While exports face pressure, inflation is expected to cool rapidly. Due to falling energy prices and a stronger euro, the European Commission projects that the average inflation rate in the Eurozone will be 1.7% in 2026, below the European Central Bank's target of 2%. This will prompt the ECB to release new forecasts in early June and may lead to further cuts in borrowing costs to achieve its inflation target.

Although the euro has unexpectedly risen since the imposition of tariffs, lowering import prices and helping to curb inflation, the stronger euro has also reinforced the negative impact of high tariffs on exports. Dombrovskis stated:

A stronger euro has both advantages and disadvantages; it has a deflationary effect, but it can also negatively impact exports, so it is a double-edged sword.

Germany Faces Challenges, Infrastructure Investment Brings Hope

As Europe's largest exporter, Germany is expected to be severely impacted by the U.S. tariff increases. The European Commission currently predicts that the German economy will stagnate this year, down from a previous forecast of 0.7% growth.

However, this does not take into account the German government's plan to invest €500 billion in upgrading infrastructure and increasing defense spending. The European Commission believes that these investments will lead to a 1.25% growth in the German economy by 2029 and a 2.5% growth by 2035