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Tariffs? European Commission issues (serious) warning about impact on the economy

“The escalation of trade tensions between the EU and the US could depress GDP and reignite inflationary pressures. Heightened trade tensions between the US and other major trade partners could also have spillover effects on the EU economy,” stated the European Commission in its spring forecasts released today in Brussels.

“Recent episodes of market ‘stress’ have highlighted the contagion potential posed by non-banking financial institutions which, if they affect the banking sector, could disrupt credit flows,” warned the institution. It also acknowledged “negative repercussions on global financial conditions and on EU external demand” due to potential tightening of US monetary policy.

At a press conference unveiling the document in Brussels, European Economy Commissioner Valdis Dombrovskis noted that “the unpredictable and seemingly arbitrary logic underlying the US customs duties announcements has driven global economic policy uncertainty to levels unseen since the darkest moments of the COVID-19 pandemic.”

He emphasized that “the average tariff rate applied by the US on imports is currently higher than at any time since the 1930s.”

Valdis Dombrovskis further highlighted that “the announcements of US tariffs in April also resulted in very high levels of financial market volatility,” admitting that “sentiment is fragile, as uncertainty regarding US trade policy and the broader economic policy remains high.”

Precisely due to this trade uncertainty, Brussels projects, based on the impact of the US tariffs announced by early April, a “notable contraction in global trade and economic activity.”

Specifically, by the end of 2026, due to such tariffs, global GDP would be 0.4% below the benchmark value, and global trade would decline by 2.9%.

“While the cumulative growth in 2025 and 2026 in the United States would be about one percentage point lower than a baseline scenario without tariffs, the EU would experience a significantly milder impact, of about 0.2 percentage points,” noted Valdis Dombrovskis.

Nonetheless, “in our forecasts, it is impossible to separate the effects of tariffs from the increase in uncertainty and the tighter financial conditions on growth and inflation outlooks,” added the official, reinforcing that “these figures do not include indirect effects on investor confidence and sentiment, nor the consequences of potential market turbulence and volatility.”

In these spring forecasts, global growth outside the EU is now projected at 3.2% for 2025 and 2026, down from the 3.6% forecast in autumn 2024.

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