Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 26
THE DRUMMER'S EAR | RHYTHMIC REASONING
that partly explains rosier forecasts for 2025, although by the same
token takes away from 2026 expectations when we see growth
slowing to 1.0% as exports strength retreats amid tariffs.
to offset challenges posed by U.S. trade policy, though we do
not anticipate a significant outperformance for this expenditure
category.
At writing, we do not yet have international trade data for 3Q (only
to July), but data at hand show that nominal exports to the U.S. in
June and July sat around their lowest levels since 1H23. The U.S.’s
15% tariff on European Union goods agreed by the two parties in
July is indeed half of the threatened 30% rate prior to the ‘deal’ but
it still represents a massive headwind for the Eurozone’s exports
that will likely keep them depressed for the foreseeable future. The
15% duty rate was not officialised until September, retroactive to
August 1st, during which period autos were facing a higher 25% rate
that will now likely be rebated yet still impacted shipments.
Fig. 3: German employment growth stalls
3%
YoY % change
2%
1%
0%
-1%
-2%
Fig. 2: The Eurozone faces a large
tariff shock, even with 15% tariff 'deal'
-3%
2005
16%
14.7%
12%
8.7%
8%
4%
0%
2021
2022
2023
% on dutiable imports
2024
2025
% on all imports
Source: U.S. ITC, Scotia Wealth Management
In July, U.S. imports from the Eurozone faced an effective duty
rate of 8.7%, up from 1.2% in 2024 (Fig.2); Germany’s faced an
effective duty rate of 11.2%, ~10ppts higher than last year. To boot,
the EUR has appreciated by ~13% in the year-to-date, further
dragging on the competitiveness of European exports to the U.S.
The current tariff arrangement with the U.S. has also put a pin
on the future of pharmaceutical tariffs or the possibility of higher
tariffs on E.U. vehicles and parts. In 2024, pharmaceuticals and
medicines accounted just over a quarter of U.S. imports from the
Eurozone, while motor vehicles and parts represented around a
tenth.
The White House’s focus on lower domestic drug prices points
to a high possibility that it levies higher tariffs on pharmaceutical
imports to pressure firms to lower their prices or increase U.S.based production. President Trump has stated that tariffs on these
goods may reach up to 200% to kick in late-2026 to give firms time
to adjust, but it’s unclear whether the U.S. may soon consider a
ramp-up in these duties towards an end-2026 tariff rate target that
heavily impacts European exports.
2009
2013
2017
2021
2025
Source: Destatis, Scotia Wealth Management
Personal consumption averaged only 0.2% QoQ growth during the
first half of 2025, under half of the 0.5% rate pace it averaged during
2H24, with households likely responding to economic anxiety and
an ongoing deceleration in jobs creation in the Eurozone as a
whole, but most notably in Germany (Fig. 3). Nevertheless, the
household sector is expected to remain the main contributor to
the Eurozone’s expansion over the forecast horizon with inflation
remaining under control and supportive real personal incomes,
with average wages adjusted for inflation expanding at a ~2% click
since 1Q24 (or about double its pace in the 2014-2019 period).
However, forward-looking earnings and negotiated wages data
point to slowing nominal pay growth in the quarters ahead, which
should limit the pace of consumption growth.
In light of an expected normalization of economic conditions as
well as inflation set to oscillate around the ECB’s 2% target, we now
believe that the ECB will keep its key deposit facility rate at 2.00%,
the level it has held since June 2025. We had previously pencilled
in slight additional easing by the ECB to a terminal level of 1.75%
with a 4Q25 25bps rate cut to give a bit more room to the economic
expansion.
The ECB’s relatively hawkish September decision significantly
raised the bar for more cuts, despite the ECB’s latest forecasts
showing slightly sub-target headline and core inflation over
2026-27, alongside moderately muted GDP growth. At its decision,
the ECB cited reduced trade uncertainty as an offsetting factor to
the higher-than-expected tariff level when it comes to GDP growth,
to be backed by continued rising real wages and employment and
the tailwind of fiscal outlays. The hit from 15% tariffs becoming
clearer may sow some uncertainty regarding an on-hold stance at
the ECB but ultimately fail to push the bank in the direction of
additional easing.
Setting international trade developments aside, the Eurozone’s
domestic economy remains sluggish. Gross fixed investment was
muted, averaging 0.3% QoQ (excluding volatile Ireland data). In
2026, investment should get a boost from stimulus or defense
spending support across the Eurozone and lower ECB rates
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