Economic Watch: Eurozone's economy grows slightly as U.S. tariffs bite

The GDP slowdown is largely attributed to the uncertainties around the U.S. tariff policies, which will continue to cast a shadow on the euro area economy despite a newly reached agreement between the EU and the United States.

BRUSSELS, July 31 (Xinhua) -- The economic growth of the euro area nearly came to a halt in the second quarter this year as uncertainties triggered by U.S. tariffs took a toll.

The Eurozone Q2 GDP increased by 0.1 percent quarter on quarter and 1.4 percent year on year, according to figures published by the statistical office of the EU on Wednesday.

The GDP slowdown is largely attributed to the uncertainties around the U.S. tariff policies, which will continue to cast a shadow on the euro area economy despite a newly reached agreement between the EU and the United States.

MINIMAL GROWTH

The euro area economy narrowly escaped stagnation in the second quarter when it recorded the lowest quarterly growth rate since the beginning of 2024.

The economic slowdown of the euro area contrasts sharply with the first quarter when the economy fared surprisingly well and went up by 0.6 percent.

Germany, the eurozone's largest economy, saw its GDP fall 0.1 percent in the second quarter from the previous quarter, following a 0.3 percent expansion in the first. Italy, which is heavily exposed to trade tensions, also posted a 0.1 percent quarter-on-quarter decline, reversing its 0.3 percent growth in the first quarter.

Spain's economy grew robustly with the highest rates driven by domestic consumption and investment, up 0.7 percent compared with the previous quarter. France and Portugal also advanced, up 0.3 percent and 0.6 percent, respectively.

Ireland's GDP declined by 1 percent in the second quarter, a sharp reversal from the staggering 7.4 percent growth recorded in the first quarter, marking the steepest quarterly drop among eurozone countries in Q2.

The economic slowdown in the second quarter was in line with expectations that the reversal of the front-loading effect, coupled with the U.S. tariffs, had weighed on the euro area economy.

U.S. TARIFFS BITE

The European Central Bank (ECB) has identified U.S. tariff policies as one of the most significant challenges facing the eurozone economy.

At a press conference last week, ECB President Christine Lagarde confirmed that front-loaded exports had helped boost euro area growth in the first quarter. But in the second quarter, countries heavily dependent on exports were hit hard by the U.S. tariffs.

The Trump administration announced in March that imports of steel and aluminum products from the EU would face a 25 percent tariff, which was raised to 50 percent by the end of May.

"The erratic tariff policy of the USA is hitting Europe's economy hard -- especially Germany," said Gunnar Groebler, CEO of German steelmaker Salzgitter.

The EU and the United States later reached a deal to impose a 15 percent tariff on nearly all European imports, avoiding a worst-case scenario of a 30 percent levy threatened by U.S. President Donald Trump.

But the agreement has drawn skepticism, with critics warning that even a 15 percent tariff will inflict serious damage on the European economy.

Most independent estimates put the one-time hit to EU GDP at between 0.3 and 0.5 percentage points, with Germany bearing the brunt, while France and Italy are expected to experience a more limited impact, according to Nick Brooks, head of economic and investment research at private equity firm Intermediate Capital Group.

"The deal agreed yesterday is not a good deal -- it is appeasement," said Julian Hinz, an international trade expert at the Kiel Institute for the World Economy.

"While the EU may avert a trade war in the short term, it is paying a high price in the long term by abandoning the principles of the multilateral, rules-based world trade system of the World Trade Organization (WTO), which has been instrumental in guaranteeing Europe's prosperity to date."

RESILIENCE AMID UNCERTAINTY

While U.S. tariffs are weighing on the eurozone economy in the short term, institutions like the ECB remain optimistic that fiscal spending and other factors will support a long-term recovery.

Lagarde said last week that first-quarter growth was driven not only by front-loading exports but also by stronger private consumption and investment.

"The economy has so far proven resilient overall in a challenging global environment," the bank said in a statement.

Inflation -- long the bank's top priority -- has been largely contained. Eurozone inflation edged up slightly to 2 percent in June from 1.9 percent in May.

With what the bank calls the "inflationary shock of the past few years" now behind it, the bank believes "fiscal and structural policies should make the economy more productive, competitive and resilient."

According to the European Commission's forecast, the eurozone economy is expected to grow 0.9 percent in 2025 and 1.4 percent in 2026.

However, headwinds remain. "With the 15 percent U.S. universal tariff likely to subtract around 0.2 percent from the region's GDP, growth is likely to remain weak in the rest of this year," said Franziska Palmas, senior Europe economist at Capital Economics.

There are also early signs of recovery. The euro area's composite Purchasing Managers' Index (PMI) for manufacturing and services inched up to 51.0 in July from 50.6 the previous month, signaling modest expansion. ■