In recent months, significant economic developments have occurred on both sides of the Atlantic. In Europe, Germany shifted its traditional fiscal austerity policy by amending its constitution to ease the debt brake and approving a €500 billion infrastructure plan spanning 12 years. Around the same time, the European Commission unveiled the ReArm Europe initiative, proposing €800 billion in defense spending over four years, pending approval at the June European Council meeting.
Globally, the economic landscape was shaken on April 2 by what was termed ‘Liberation Day,’ when Trump announced a universal 10% tariff and additional protectionist measures. Market reactions were swift, leading to a temporary delay of the harshest measures. However, tensions with China escalated, resulting in an average effective tariff of nearly 15% by the U.S., up from 2.5% in 2024.
Our revised international outlook assumes a 10% bilateral tariff between the U.S. and EU, which seems reasonable to exert pressure without provoking large-scale retaliation. For U.S.-China relations, we anticipate tariffs reaching 60% by 2025, though this increase may not be as gradual as initially thought. Consequently, we project the euro to appreciate by 8% against the dollar, with energy prices significantly lower due to global slowdown risks.
European economies showed unexpected strength in Q1 2025, partly driven by pre-tariff export surges. However, this is expected to reverse in coming quarters amid less favorable external conditions. Overall, Eurozone growth is forecasted at 0.9% for 2025 and 1.1% for 2026, reflecting downward adjustments. Inflation is revised down to 2.0% for 2025 and remains at 1.9% for 2026.
In the U.S., tariffs negatively impacted activity sooner than expected, with GDP contracting by 0.1% in Q1 2025. Growth forecasts are cut to 1.3% for both 2025 and 2026. Inflation expectations are lowered to 2.9% for 2025 and 2.6% for 2026.
China’s Q1 2025 growth was driven by export increases ahead of tariff impacts. Future prospects are challenging due to U.S. protectionism, though trade reorientation to Asian markets offers some relief. We slightly lower China’s growth forecasts to 4.1% for 2025 and 3.7% for 2026.
— new from CaixaBank Research