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. The ECB will probably look through this and keep monetary policy unchanged, but the risks are skewed towards lower inflation and interest rates.
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