Eurozone gross domestic product (GDP) is expected to remain subdued this year growing at 1.1 per cent, as multiple uncertainties weigh on domestic demand while higher US tariffs start to weaken foreign demand, according to S&P Global Ratings.

After 2025, the growth is expected to accelerate above the potential, reaching 1.4 per cent in 2027. Lower policy rates, strong private balance sheets that translate into a resilient labour market, and expansive fiscal policies will provide medium-term tailwinds.

“Our forecasts have only changed slightly since our last update in June 2025. The US and EU administrations’ trade deal has not altered the macroeconomic picture much. Our higher GDP growth forecasts for 2025 reflect a larger GDP carryover at the end of 2024 due to data revisions in some countries,” S&P Global Ratings said in its latest report titled, ‘Economic Outlook Eurozone Q4 2025: Recovery Continues Despite Consumer Hesitancy.’

Eurozone GDP growth is forecast at 1.1 per cent in 2025, with recovery accelerating to 1.4 per cent by 2027, supported by lower rates, strong labour markets, and fiscal policy, according to S&P Global.
Inflation is projected at 2.1 per cent in 2025 before easing.
Risks include higher US tariffs, geopolitical tensions, and weak confidence, though impacts vary across countries.

The eurozone economy remained resilient in the second quarter (Q2) of 2025. However, this is largely because exports to the US—which were front run ahead of tariffs in the first quarter—were slow to reverse in the second quarter. The report believes this reversal will extend into the third quarter.

The euro has appreciated more quickly than expected, largely owing to market concerns about the independence of US monetary policy. While this has given European consumers an extra boost via lower energy prices, it has not prompted a downward revision of inflation forecasts.

Strong labour-market conditions are expected to keep real wage growth above productivity for some time, sustaining inflationary pressure over the medium term.

S&P Global Ratings projects inflation to ease to 1.8 per cent in 2026 and 1.9 per cent in 2027, aligning closely with the European Central Bank’s (ECB) 2 per cent target. Barring external shocks, the ECB deposit facility rate is considered to have bottomed out at 2 per cent in the current rate-cutting cycle. Quantitative tightening is also nearing completion, which may ease long-term yields on euro-denominated government bonds.

Key risks to the baseline growth outlook include heightened tariffs, geopolitical tensions, and weak consumer confidence in certain European economies. Additional spillover effects may emerge from slower growth among Europe’s major trading partners, particularly the US, added the report.

Inflation risks remain two-sided: it could rise further in the event of escalating trade tensions, fiscal stimulus overlapping with labour-market bottlenecks, or geopolitical shocks disrupting commodity markets. Conversely, it could fall if trade diversions favour Europe or the euro appreciates more sharply than expected.

Following the recent EU–US trade announcement, baseline assumptions now include a maximum US tariff of 15 per cent on most manufactured goods. This compares with June 2025 assumptions of 10 per cent on all goods.

Despite these changes, the macroeconomic implications remain largely unchanged. At the aggregate EU level, the direct trade impact is estimated at around -0.4 per cent of GDP, only slightly lower than the -0.5 per cent implied by the April 2 announcement. Nevertheless, tariffs are now about eight times higher than they were before April, when the US levied an average tariff of less than 2 per cent on European imports.

Importantly, the tariff burden will vary across countries. Ireland and Belgium face fewer negative impacts. In contrast, Switzerland—though not an EU member—has seen its outlook deteriorate sharply after the US imposed 39 per cent tariffs, significantly affecting its growth prospects.

Fibre2Fashion News Desk (SG)