Tariff-linked volatility not to hit eurozone demand recovery: S&P

Public spending on infrastructure and defense should boost growth from 2026. Growth will likely accelerate substantially to 1.1 per cent in 2026 and 1.4 per cent in 2027. This acceleration will benefit from strong private sector balance sheets, expansive fiscal policies and lower key interest rates, the rating agency said in a release.

It expects core inflation to remain close to the European Central Bank's (ECB's) target. Further rate cuts are unlikely, unless new shocks occur. It has revised its headline inflation forecast for 2026 downward to 1.7 per cent from 1.9 per cent.

In a severe tariff scenario, it could reduce its eurozone growth forecasts for 2025 and 2026 by 0.4 per cent, with the ECB potentially resuming rate cuts.

Downside risks to growth persist. These are primarily linked to US-EU trade negotiations, potential spillovers from financial markets, geopolitical developments and uncertainties about European countries' fiscal plans, which are not concrete.

Inflation risks result from upside pressures, such as countertariffs, fiscal stimulus coinciding with labour market bottlenecks, and geopolitical developments impairing oil markets. Downside risks include trade redirection to Europe and another disorderly appreciation of the exchange rate.

The number of jobs in the European economy rose by 3,000 in the first quarter this year. Employment reached a new record high, with the unemployment rate at a record low of 6.2 per cent. This was despite a decline in job openings to 2.4 per cent of the labour force.

The steady rise in employment since 2023, amid near-stagnant GDP growth, is an anomaly which, S&P Global Ratings expects, will correct at some point.

So far, the labour market adjustment appears positive. GDP growth outpaced employment growth at the start of 2025. This reduced the unusually large productivity gap and unit labour costs.

The final terms of the tariff deal between the EU and the United States could significantly alter the rating agency’s short-term baseline forecasts. The possibility of EU counter-tariffs adds another layer of uncertainty.

ALCHEMPro News Desk (DS)