📝A Trump Hard Scenario Would Hit EU GDP By 1.7pp: ABN Amro

The eurozone exports around €460bn annually to the US, which is 16% of total extra-EZ exports, and 4% of GDP.

European Commission sources have estimated that, under a 10% universal tariff, exports to the US could fall by nearly 1/3, a figure consistent with our own analysis. Translating this directly to GDP would yield a 1.2p growth hit. However, there would be second-round effects, via lower employment and business and consumer confidence. Indeed, the weak starting point for eurozone industry - still struggling to recover from the energy crisis - could amplify these second-round effects. Germany is especially vulnerable. Its three biggest exports to the US - chemicals, machinery and transport - are still experiencing demand shortfalls following recent shocks. The US tariffs could be the blow that tips the German economy into a more serious downturn. Taken together, and assuming the 10% tariff is implemented later in 2025 after Trump takes office, our analysis suggests the total hit to eurozone GDP would peak at close to 1.7 pp, with the trough in growth occurring in Q1 2026. Such a scenario would probably not be enough to push the eurozone aggregate into a recession, but the growth impact would be akin to the energy crisis, with the economy essentially stagnating in 2026.

Inflation would also be much lower, with the biggest impact coming from lower energy prices - partially blunted by a weaker euro - but also through the hit to activity and confidence, which would weigh on core inflation. All told, we estimate inflation would be 0.5pp lower at peak impact (on average 0.2pp lower over the horizon), with the trough in inflation coming after the trough in GDP, in Q3 2026. Given the risk of recession and the significant inflation undershoot, we think the ECB would continue to cut rates well beyond our current base case (which sees the deposit rate falling to 1.5% by late 2025), with rates falling to 0.25% by early 2026. However, as we discuss later, the reaction of the ECB will also depend significantly on how the Fed responds to the growth and inflation shock in the US.-ABN Amro