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Eurozone: Economy holds up better-than-expected in 2Q; EU-US trade deal waiting to be finalized; ECB in wait-and-see mode
- The European Union (EU) continues to work with the US to finalise a Joint Statement, as agreed on 27 Jul, where both EU head Ursula von der Leyen and US President Donald Trump struck a deal on tariffs. The centerpiece is a 15% baseline tariff on almost all European exports to the US, except for steel, aluminum and pharmaceuticals.
- The EU-US trade deal may have helped avoid a deeper trade conflict, but the ongoing uncertainty and increased costs for EU exporters, as well as weakening external demand are likely to keep economic growth subdued through the rest of the year. We have nonetheless revised out forecasts for Eurozone GDP growth to 0.9% (from 0.5% previously), and 1.1% (from 1.0% previously) for 2025 and 2026, respectively.
- The European Central Bank (ECB) is expected to take a cautious and data-dependent approach. At this juncture, we expect a 25-bps cut at the next ECB meeting on 11 Sep, and we see the ECB cutting again by 25 bps in Oct or Dec. We recognize that the ECB is approaching the end of its current rate cutting cycle; but much depends on how tariffs, growth and inflation evolve.
The European Union (EU) continues to work with the US to finalise a Joint Statement, as agreed on 27 Jul, when both EU head Ursula von der Leyen and US President Donald Trump struck a deal on tariffs. The EU-US trade deal was announced at Trump's luxury golf course in western Scotland after an hour-long meeting.
This comes after months of negotiations, and just days before the 1 Aug deadline when Trump threatened to impose steep levies on European goods had an agreement not been reached. Both the EU and the US are each other's largest trade partners and account for 1/3 of all global trade. In 2024, two-way trade in goods and services reached nearly $2 trillion. The US ran a $235.6bn goods trade deficit with the EU. Pharmaceuticals, car parts and industrial chemicals were among Europe’s largest exports to the US.
Key takeaways:
The centerpiece is a 15% baseline tariff on almost all European exports to the US, except for steel, aluminum and pharmaceuticals. That compares with the 10% baseline ‘reciprocal’ tariff rate but is materially lower than the 20% rate that Trump imposed, and later paused, on ‘Liberation Day’, as well as the 30% rate in Trump’s Letter to Von der Leyen.
Steel and aluminum will still be taxed at 50%, dashing the hopes of both these industries in the bloc.
The 15% tariff also applies to autos (down from the 27.5% rate introduced in Apr). This will bring relief for the bloc’s auto sector, employing around 13 million people.
Semiconductors and pharma products will also be taxed 15%. However, ongoing US ‘section 232’ investigations into semiconductors and pharma products, which could lead to US tariff increases, are set to report findings in two weeks’ time. According to von der Leyen, these will be dealt with ‘on a separate piece of paper’.
The EU also committed to buy $750 billion of liquefied natural gas, oil and nuclear fuels from the US over three years – to replace Russian energy sources. The EU will also pledge $600 billion more in additional investments in the US over the course of Trump’s second term.
Both partners will adopt ‘zero for zero’ tariffs on aircraft (and parts), certain chemical and agriculture products, and various raw materials. A full list has yet to be finalised.
Lee Sue Ann
Economist
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