How Tariff Troubles May Hurt Europe’s Growth

17 April 2025

3 min read

President Trump’s tariffs bring déjà vu for the euro-area economy: it’s back to slower growth and lower rates.

Markets rallied on the announcement of President Trump’s 90-day pause in his administration’s new global trade tariffs—with notable exceptions:

The moratorium was restricted to trade partners that haven’t retaliated.
Reciprocal tariffs weren’t lifted but instead lowered to 10%, except for China, which is now subject to a 125% levy.
The 25% global tariff on steel, aluminum and automobile imports remains in force.

As well as the actual impact of the tariff measures, business confidence has also taken a hit, with survey evidence already pointing to lower economic growth. Further tariff-related initiatives, such as the US inquiry into imports of pharmaceutical goods and semiconductors, will likely create more uncertainty and loss of confidence.

Tariffs Are Already Damaging Europe’s Growth

Instead of the previously announced 20% tariff, the European Union (EU) is now subject to a 10% universal tariff—still a higher effective tariff rate than prior to the April 2 US announcement. Meanwhile, the EU voted on April 9 to impose tariffs on €21 billion of US goods—countermeasures that have also been put on hold. Despite the tariff pauses, the danger for euro-area economies is far from over, and damage is already being done.

Based on our assessment, growth is set to fall, with risks skewed to the downside. Compared with a counterfactual scenario in which the new tariffs were never implemented, and with only marginal damage to confidence, the hit to growth will probably be substantial. In the Display below, we show our 2025 forecasts across different scenarios. The wide range of possible outcomes reflects the high level of tariff uncertainty.

Tariff Uncertainty: The Range of Potential Outcomes Is Very Wide

Comparative Forecast Scenarios for 2025 Growth, Inflation and Rates (Percent)

Comparative forecast scenarios for 2025 growth, inflation and rates show a very wide range, reflecting tariff uncertainty.

For illustrative purposes only.
*Counterfactual scenario: assumes tariffs were never implemented and damage to confidence is marginal.
†Upside scenario: the current 90-day pause is extended to become a permanent removal of universal tariffs, except for China.
All percentages are shown as point estimates to present a clear difference between the counterfactual and other scenarios. Actual range of outcomes may be wider.
As of April 15, 2025
Source: AllianceBernstein (AB)

With economic recovery still only recent and weak, the euro area is once again likely to face low growth or recession risks, partly from tariff impacts and partly from uncertainty and loss of confidence.

Risks of Inflation Undershoot Are Rising

The eurozone was already heading towards its target 2% inflation on a sustainable basis during the course of this year. However, with growth now expected to weaken and the economy potentially to enter recession, the downward pressure on inflation is likely to intensify, aided by three additional factors:

Energy prices are a major driver of inflation: they fell significantly following the April 2 US tariff announcement and remain relatively depressed.
Financial conditions in the US have been tightening, and the euro area could experience the initial knock-on effects. Meanwhile, the euro has strengthened against the US dollar, making US imports cheaper. If the euro remains strong, this effect will continue.
China will continue to seek markets for its exports because tariff barriers make exporting to the US uneconomic. The country will likely reroute its goods to other regions, notably the EU. This was the case during Trump’s first round of tariffs, when exports to the EU surged (Display, below). The reaction is likely to be greater this time around.

More Chinese Exports May Be Heading Europe’s Way

Previous US Tariffs Led to Rerouting of China Exports

Two lines showing imports from China to the US and EU sharply diverge in 2018, the date of the first round of Trump tariffs.

Current and historical analyses do not guarantee future results.
As of December 31, 2024
Source: Statistical Office of the European Communities (Eurostat)

Hence, our baseline forecast is that the European Central Bank will cut policy rates to below 2%, reaching 1.75% by the end of December. The probability of more cuts increases in line with recession and undershooting risks.

No Easy Solutions from Fiscal Policy

Fiscal policy is unlikely to be as supportive as it was during the energy crisis, as most EU member states face tight budget constraints.

Some countries might provide sector-specific relief, like the €14 billion package the Spanish government announced recently. But only Germany has the headroom to provide material fiscal support. Given that Germany could be facing a third year of recession, it’s possible that fiscal restrictions will be suspended to provide immediate support to its industries.

Even so, the EU as a whole faces a tough position.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

This website is only directed at persons residing in Singapore. Persons resident in territories other than Singapore should not access this website. This website is not directed to any person in any jurisdiction where (by reason of that person's nationality, residence or otherwise) the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction. By accessing this website, you are representing and warranting that the applicable laws and regulations of your jurisdiction allow you to access the website, and that you have agreed to the terms of use.

This content is provided on an "AS IS" basis. No representation or warranty, whether express or implied, is made with respect to the accuracy, validity or completeness of this content, and any liability for errors or omissions in such content is expressly disclaimed. This content may contain projections and other statements regarding future events or the future financial performance of countries, regions or markets. These statements will necessarily only be predictions, and actual events or results may differ. You should make your own assessment of the relevance, accuracy and adequacy of the information provided and make such independent investigations as you may consider necessary or appropriate. Any opinion or views offered are made on a general basis and are not to be relied on as advice. The views expressed here may change at any time after the date of this publication. Accordingly, neither AB nor any of its affiliates, associates, directors, connected parties and/or employees accept any liability whatsoever for any loss, whether direct or indirect, that may arise from the use of the information or opinions provided.

AllianceBernstein (Luxembourg) S.à.r.l. is the management company of the Portfolios and has appointed AllianceBernstein (Singapore) Ltd. (Company Registration No. 199703364C) as its agent for service of process and as its Singapore representative. AllianceBernstein (Singapore) Ltd. is regulated by the Monetary Authority of Singapore. This advertisment has not been reviewed by the Monetary Authority of Singapore.

The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice.

AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.

The contents of this site are general in nature, for general information only and prepared without consideration given to the specific investment objective, financial situation and particular needs of any specific person. This site contains the views and opinions of particular individuals and may not necessarily represent views expressed or reflected in other AB communications, strategies or funds. Reliance should not be placed on these views and information when making individual investment and/or strategic decisions.

Past performance, historical and current analyses, and expectations do not guarantee future results.

Investment involves risk. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernsteinL.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.