Uncertainty stemming from US trade tariffs is projected to have a significant negative impact on both the eurozone and UK economies over the next two years, an effect that cannot be fully offset by increased defense spending in 2025.
According to S&P Global’s most recent report, economic uncertainty is expected to decrease the eurozone’s economy, which is valued at €14.6 trillion, by a cumulative 0.4% of GDP from 2025 to 2026. This forecast, which was compiled before the announcement of 25% tariffs on US car imports, also reduced expectations for the eurozone from 1.2% to 0.9% growth for 2025 due to the same uncertainty.
Sylvain Broyer, Chief EMEA Economist at S&P Global, suggested that uncertainty poses a greater risk to the European economy than the tariffs themselves. However, there is hope for growth, with the potential of reaching 1.4% GDP increase in 2026, thanks to fiscal stimulus measures in Germany and the EU.
Broyer analyzed the potential impact of various tariff scenarios on the bloc’s economy. In the worst-case scenario, with a 25% increase in US tariffs on all EU imports, eurozone GDP growth could be limited to 0.5% in 2025 and 1.2% in 2026. It is predicted that the European Central Bank (ECB) would cut interest rates more than once this year and raise them later than currently anticipated.
In response to White House announcements proposing 25% tariffs on all cars and car parts, Broyer stated that their forecast had already accounted for a potential 10% tariff of this nature. An additional 15% would reportedly have a limited effect on current figures. Germany, with its higher reliance on US car exports, is expected to be more significantly impacted, which could lower its GDP by 0.1% for 2025.
Despite the challenges, confidence in Europe is increasing, buoyed by declining interest rates and inflation, which continue to support the labor market. The proposed increase in defense spending by EU member states, which could boost eurozone GDP by 0.1% in 2026, 0.2% in 2027, and 0.3% in 2028, is also contributing to this optimism.
S&P Global forecasts that the ECB will cut rates one more time this year and start raising its key interest rate in the second half of 2026, with two hikes expected, until the deposit facility rate reaches 2.75% by the end of the next year. The risks to this forecast include trade uncertainty, fiscal execution failure, and the impact of the US economy if it is hit by higher import prices.
In a separate economic forecast focused on the UK, which was released before the tariff announcement, S&P Global significantly reduced its growth expectations for the British economy to 0.8% from 1.5%. This change is attributed to high inflation, weak export volumes, and tight monetary policy. If the UK is unable to avoid the newly announced 25% tariffs on car exports to the US, this could lead to a 0.2% hit to GDP, stated Marion Amiot, Chief UK Economist at S&P Global Ratings.
UK export growth is also hindered by the strong value of the pound and elevated labor and energy costs for companies. However, there could be an uptick in demand for defense, potentially benefiting the UK as the fourth-largest defense exporter in Europe due to increased EU military spending.
The Bank of England’s next monetary policy move is uncertain, as the government has limited fiscal space. Although there are hopes for a rate cut as inflation figures for February were encouraging, policymakers remain cautious. S&P Global expects the interest rate to be reduced to 4% by the end of the third quarter of 2025, with a more optimistic growth forecast for 2026.
In summary, US trade tariffs are expected to negatively impact the eurozone and UK economies, creating uncertainty that cannot be entirely alleviated by increased defense spending. While there are risks and challenges, there are also signs of hope, especially with proposed increases in defense spending and a potential rebound in 2026.
Source: https://www.euronews.com/business/2025/03/29/tariffs-and-defence-spending-sp-global-slashes-eurozone-and-uk-growth-forecast
