War, China and tariffs
The eurozone economy is one of the most vulnerable to the Middle East war among the major economies. Although we anticipate that rising energy prices will be a temporary phenomenon, their negative impact is undeniable. At the same time, it’s important to remember that other structural challenges, such as strong competition from China and ongoing US trade tariffs, persist. And while the European Parliament has suspended ratification of the US trade deal following the Supreme Court’s move to strike down parts of Trump’s tariff package, we see little reason to expect a meaningful easing of tariffs anytime soon.
Slowing, but not halting the recovery
For Europe, higher energy prices essentially act as a foreign tax on households and businesses. Thanks to a high savings ratio, European consumers should generally be able to absorb these increased costs. However, the risk remains that diminished confidence could prompt households to save even more, rather than less.
The manufacturing sector faces renewed difficulties, having already endured higher energy costs compared to the US and China. Despite these challenges, manufacturing entered the year with some momentum, supported by relatively low inventory levels. Additionally, Germany’s fiscal stimulus is expected to gradually bolster the economy. As a result, we believe the current crisis will temporarily slow the recovery but not halt it altogether. We are forecasting weaker growth in the first half of the year, followed by a rebound in the second half, culminating in 1.1% GDP growth for 2026, after 1.5% in 2025.
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