Europe Outlook: Inflation at the target but growth will be weak

The euro-zone’s strong first-quarter growth rate was a result of tariff front-running and will be reversed in Q2 and be followed by weak growth in the second half of the year. Further ahead, we think the euro-zone will grow more slowly than official forecasters anticipate even though the hit from US tariffs should be quite modest. Next year we expect looser fiscal policy to boost growth in Germany but in the euro-zone as a whole fiscal policy will be broadly neutral. With the exception of Italy, the southern economies should continue to grow quite rapidly for the next couple of years, helped by high immigration. Risks of a systemic fiscal crisis now look quite low but public finances in France and Italy are fragile and problems could flare up at some stage. Meanwhile, we expect the Swiss National Bank to cut its key policy rate back into negative territory in the second half of the year.