Economic growth has been fairly resilient to tariffs so far and, as long as tariffs stay around the 15% agreed in the EU-US trade deal, the hit to activity should be small. But growth will be sluggish over the rest of this year and next as low confidence and slowing income growth weigh on consumption, while euro-zone exporters struggle with deteriorating competitiveness. Germany’s fiscal stimulus should provide a temporary boost to growth next year, but we don’t think that higher defence spending will do much to raise growth prospects elsewhere. Meanwhile, we think that inflation will undershoot the 2% target in 2026 as energy prices decline and wage growth keeps slowing. As a result, we think the ECB may be forced to cut interest rates in 2026, so we have pencilled in two more 25bp cuts.
Elsewhere, we think that the SNB will cut rates back into negative territory later this year while Norges Bank will follow up its 25bp cut in June with one more cut early next year. But we suspect that the Riksbank will keep its policy rate at 2% over the coming quarters.