Rhythmic Reasoning_Highlights_SWM_EN - Flipbook - Page 9
EUROZONE & U.K.
Eurozone: German stimulus to offset trade headwinds
Germany’s public stimulus ramp-up over the next few quarters should act as a decent
offset to trade challenges weighing on the private sector in the Eurozone’s largest
economy. Nevertheless, GDP growth in Germany, France, and Italy (55%+ of the
Eurozone) is still only seen around 1% in 2026, on par with our expected forecast for
the Eurozone, slowing from 1.2%, as Spain and the Netherlands also shift into lower
gears.
The outlook for trade also remains precarious given the risks of high U.S. import tariffs
on pharmaceuticals or the White House reneging on current commitments.
Meanwhile, the ECB has signaled it is comfortable with its current monetary policy
stance, pointing to only slight easing ahead that will be but a small economic support.
15% Tariff ‘Deal’ with the U.S. Still Remains
a Large Challenge for Eurozone Exports
Effective duty rate on U.S. imports from
the Eurozone
The Eurozone economy has seemingly managed to avoid a negative growth quarter in
2025, with a surge in exports in 1Q25 due to tariffs front-running boosting growth
estimates for the year. However, early-year exports-driven strength has been followed
by only modest growth expected to last into 2026, as the bloc remains constrained by
a high – even if defined – U.S. tariff rate of 15%, with pockets of headwinds such as
political unrest in France.
16.0%
14.7%
12.0%
8.7%
8.0%
4.0%
0.0%
2021
2022
2023
% on dutiable imports
2024
2025
% on all imports
U.K.: Weak growth to continue, with fiscal support at risk
Falling employment numbers amid higher labour costs and weak business sentiment
are teeing up another year of disappointing U.K. GDP growth in 2026, eyeing a ~1%
expansion for the third consecutive year.
Government spending is expected to remain the U.K.’s growth leader over the next
few quarters, albeit at a decelerating rate—particularly from around mid-2026.
Ongoing fiscal worries and elevated government disapproval rates may further impact
these plans, while weighing on overall economic confidence.
U.K. payrolls have now fallen for 11 out of the past 13 months totalling around 150k
positions lost with firms pointing to minimum wage hikes, higher employer pension
contributions, and political and trade uncertainty – all factors that should continue to
limit hiring in the quarters ahead.
The BoE has had to stick to a highly cautious approach that falls short of supporting
the economy as it gradually removes policy restrictiveness due to labour-cost pass
throughs into prices, with services inflation remaining around 5% into year-end.
U.K. Fiscal Deficit Trend Challenges Stimulus Plans
16%
14.0%
12%
8%
5.4%
4%
1.9%
0%
2018
2019
2020
2021
2022
2023
Budget deficit, 4-qtr avg, % of GDP
2024
2025
