The European Commission has sharply cut its economic growth forecast for the European Union, projecting a modest 1.1% growth in 2025 and 1.5% in 2026, according to its Spring 2025 Economic Forecast released on Monday.

The report highlights a challenging economic landscape, with the EU and euro area expected to grow at just 1.1% and 0.9% respectively in 2025, mirroring 2024’s sluggish performance. The forecast assumes U.S. tariffs on EU imports will remain at 10%, with higher rates on steel, aluminum, and cars, but exemptions for certain products. Escalating U.S.-China trade tensions, with tariffs at 145% and 125% respectively, further cloud the outlook, though recent tariff suspensions offer some relief.

Despite these headwinds, the Commission anticipates a slight rebound in 2026, driven by steady consumption and recovering investment. EU exports are projected to grow modestly at 0.7% in 2025 and 2.1% in 2026, hampered by weaker global demand and competitiveness losses. Falling energy prices and a stronger euro are expected to bolster the EU’s trade surplus, maintaining a current account surplus of 4.2% of GDP through 2026.

Inflation is set to ease faster than expected, with euro area headline inflation dropping to 2.1% in 2025 and 1.7% in 2026, meeting the ECB’s target by mid-2025. Lower energy prices and competitive pressures from U.S.-China trade disruptions are key disinflationary factors, though food and services inflation may offset some gains.

The EU economy showed resilience in 2024, growing by 1.0%, supported by robust government and private consumption. However, investment lagged due to high financing costs and uncertainty, with equipment and residential construction particularly weak. Employment grew strongly, adding 1.7 million jobs, and real wages are expected to recover fully by 2025, supporting household incomes. Yet, precautionary savings and eroded wealth may temper consumption growth.

Fiscal policy is expected to remain neutral in 2025 and 2026, with the EU’s general government deficit rising slightly to 3.4% of GDP by 2026. The debt ratio is projected to inch up to 84.5%, driven by less favorable interest-growth dynamics. Flexibility in the Stability and Growth Pact for defense spending may stimulate activity, though details remain unclear.

Risks to the outlook include escalating EU-U.S. trade tensions, potential financial contagion, and persistent U.S. inflation triggering tighter global monetary conditions. On the upside, recent U.S.-China trade deals and potential EU structural reforms could lift growth. Climate-related disasters pose an ongoing threat, underscoring the need for stronger mitigation efforts.

“The EU faces a complex global environment,” the report notes, emphasizing the need for policymakers to strengthen economic resilience amid mounting external pressures. (ILKHA)