Investing in Europe: Eurozone Economy to Grow Less Strongly as Trade Spat Brews

Old_Joe

Following are edited excerpts from a current report in The Wall Street Journal: (The link to the full report should be free.)

The European Commission warns that a chiller trade landscape represents a major headwind to economic recovery

The eurozone economy is set to grow a little more slowly than previously forecast next year, but even that downbeat projection could prove optimistic if exporters face higher U.S. tariffs, according to new forecasts from the European Union.

All of the eurozone’s major economies are projected to see steady growth next year, despite political and fiscal challenges in France and a likely downturn this year in Germany. Spain is set to outpace its peers, expanding 3% this year and 2.3% in 2025, according to the forecasts laid out Friday in the commission’s autumn forecasts.

The European Commission further said-
 • The Euro nations should book an increase in their gross domestic output of 1.3% in 2025
 • This year, the currency union should grow by 0.8%
 • A chillier trade landscape represents a major headwind to the eurozone’s economic recovery
 • The ravages of a changing climate also threaten Europe
 • Inflation should average 2.4% in 2024 and 2.1% in 2025
 • Lower growth means less state revenue, adding to the strain on EU governments’ budgets
 • Still-high deficits and steeper interest payments will keep the debt-to-GDP ratio climbing

The dimmer outlook for growth and inflation will likely reassure the ECB that it can continue to lower borrowing rates, albeit at a gradual pace. The forecasts are the first since May and in the meantime, the ECB has begun a cycle of lower interest rates, taking the deposit rate to 3.25% from 4%, where it had stood since last September. The bank has indicated it will continue to trim borrowing costs as it looks to ease some of the burden on investment and activity.

The eurozone’s manufacturing sector in particular is struggling to recover from the blow it was dealt in 2022 when Russia’s full-scale invasion of Ukraine triggered a surge in energy prices. It again produced less in the third quarter of the year compared with the previous quarter, figures showed this week. Compared with January 2022, just before the invasion, eurozone industrial production has fallen a steep 6%.

While the European authorities base their projections on existing policy, a looming trade battle could add insult to injury for the beleaguered industrial sector and further depress eurozone growth. President-elect Trump has threatened to impose tariffs of 10% on European goods imported into the U.S. in what he says would be a measure to safeguard American manufacturers and manufacturing jobs.

Those tariffs could cost Germany some 1% of its GDP, Bundesbank President Joachim Nagel warned this week. And the reverberations would likely be felt across eurozone industry, hitting smaller suppliers. Nearly 25 billion euros’ worth of German exports would be at risk in the event of an out-and-out trade war next year, according to projections from insurer Allianz. French and Italian exports would also suffer a major blow.

Economists are nevertheless divided on the effects of potential new tariffs, with some even suggesting a stronger U.S. dollar could outweigh the higher duties and boost demand for European goods.