Eurozone Economic Growth Slows as Trade Tensions and U.S. Tariffs Weigh on Outlook

The eurozone economy grew slightly faster than expected in the second quarter, but the overall performance remains weak, and the region faces continued challenges from escalating U.S. tariffs.

Q2 Growth Beats Expectations but Remains Modest

• The eurozone economy expanded by 0.1% in the second quarter, surpassing expectations for no growth at all, according to Eurostat data.
• However, this marks a sharp slowdown from the 0.6% growth seen in the first quarter, and indicates that the region’s growth is still sluggish.
• On an annual basis, the eurozone GDP rose 1.4%, above the expected 1.2%, but still below the 1.5% growth seen in the prior quarter.

Sluggish Growth and Business Investment Concerns

The eurozone has struggled to maintain significant growth over the past several years. Key factors include:

• Low business investment, as companies hold back spending.
• Weak household consumption due to the impact of high inflation.

These factors have persisted even before the latest escalation in U.S.-EU trade tensions, with President Donald Trump using tariffs as a negotiating tool.

Revised Growth Forecasts

• The European Commission revised its growth forecast in May, lowering the projected growth for the eurozone economy to 0.9% for this year, down from the 1.3% forecast made last November.
• In 2026, the Commission predicts that eurozone growth will rise to 1.4%, but this is still below the 1.6% forecast from six months ago.

The Commission’s projections assume that U.S. tariffs will remain at 10% on all EU goods. However, recent developments have brought uncertainty over whether this level will hold.

Impact of U.S. Trade Deal and Tariff Increases

A U.S.-EU framework trade deal, announced over the weekend, has reduced some of the uncertainty, but the U.S. is now set to impose a 15% import tariff on most EU goods starting next month. This deal has raised concerns for European businesses, including some of the continent’s largest firms, like Adidas, which warned that tariffs would:

• Weigh on profits.
• Hold back sales.
• Curtail investment.

Mixed Performance Among Individual Countries

• Germany, the eurozone’s largest economy, saw a 0.1% contraction in the second quarter, reversing the 0.4% growth recorded in the first quarter.
• Italy also experienced a 0.1% drop in Q2, missing forecasts of a 0.1% rise.
• France, the eurozone’s second-largest economy, showed stronger performance, growing by 0.3% in Q2, above the 0.1% forecast. This was driven by a rebound in household spending.

The eurozone economy remains fragile amid global uncertainties, including trade tensions and tariff issues. While some countries have shown resilience, broader growth remains muted, and the region will continue to face challenges, particularly in light of U.S. tariffs.