Euro-Area Inflation to Fall Below 2% on US Tariffs, EU Predicts

Yahoo

19-05-2025

(Bloomberg) --
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Euro-area inflation will fall below the European Central Bank's target next year because of fallout from US trade policies, according to the European Commission.
Consumer-price growth will slow to the 2% goal by the middle of this year and average only 1.7% in 2026, the EU's executive arm said in its spring forecast released on Monday. Downward pressures including lower energy costs, the diversion of Chinese goods and a stronger euro are having a 'clearly negative' impact, the commission said.
Economic expansion is seen picking up to 1.4% next year from 0.9% in 2025, a slightly more optimistic view compared to the last ECB forecast in March and the International Monetary Fund's global outlook in April. Brussels officials see uncertainty weighing on domestic demand, but labor markets staying robust.
'Inflation is declining faster than previously forecast and is on track to reach the 2% target this year,' European Economy Commissioner Valdis Dombrovskis said. 'But we cannot be complacent. The risks to the outlook remain tilted to the downside, so the EU must take decisive action to boost our competitiveness.'
The ECB will present its own set of quarterly forecasts alongside its next rate decision on June 5. Investors are expecting another reduction in borrowing costs, with many policymakers sharing the view that US tariffs will put downward pressure on prices.
Uncertainty about how policies evolve is high. Most euro-zone exports to America are subject to a 10% tariff during a 90-day negotiation period. The EU is seeking to secure favorable terms in these talks, but it has also prepared a list of products to hit with counter-levies should discussions fail.
The EU's forecasts assume that US tariffs remain at 10%, with higher duties on some products and exemptions on others, and used a cut-off date of April 30 for other inputs. Some de-escalation between the US and China was expected, but with duties remaining at a higher level than what was announced on May 12.
The two nations agreed to temporarily slash tariffs to allow for talks after previously raising them to prohibitive levels. The tensions have raised the threat that a large amount of Chinese products get rerouted to the euro zone, intensifying competition and driving down prices.
'Given the magnitude of these flows, this is set to markedly increase competitive pressures in consumer goods markets across the EU,' the commission said. Together with the appreciation of the euro, this should push goods inflation down to close to 0% in the euro area, it said.
Services costs have remained more elevated, mostly due to robust wage growth. It's expected to slow 'only gradually' to 2.5% toward the end of 2026.
The situation presents a challenge to the ECB, which has to weigh the disinflationary impacts from tariffs in the short term against the longer-term effect from disrupted supply chains and higher fiscal spending in Europe. Many policymakers are wary of taking interests much lower and into territory where they'd boost economic activity.
When the ECB presents new forecasts next month, it will produce different scenarios to capture various possible trajectories on how US tariff policy will evolve.
Germany, the region's biggest economy, won't see any economic growth this year before rebounding to a 1.1% pace in 2026, the forecasts show. Austria is the only country in the EU predicted to suffer a contraction in 2025.
The commission expects the euro zone's collective debt burden to rise to 91% of gross domestic product next year from 89% in 2024. That doesn't include some of the higher defense spending made possible by a relaxation of the bloc's fiscal rules because the national plans weren't concrete enough.
--With assistance from Jorge Valero, Michal Kubala, Marton Eder and Harumi Ichikura.
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