Economic uncertainty linked to potential US trade tariffs is expected to cost the eurozone and UK billions in the coming years, with increased defence spending in 2025 unable to fully offset the impact.
According to S&P Global’s latest report, the eurozone’s €14.6 trillion economy will shrink by a cumulative 0.4% of GDP over 2025 and 2026 due to economic instability. The forecast, made before the announcement of 25% tariffs on US car imports, also lowered expectations for eurozone growth in 2025 from 1.2% to 0.9%.
Chief EMEA Economist Sylvain Broyer highlighted the significant threat posed by instability, stating, “uncertainty itself is likely to pose a greater risk to the European economy than the tariffs alone.”
Despite these concerns, Europe could see a recovery. Fiscal stimulus measures in Germany and the EU may support eurozone GDP growth, which is projected to reach 1.4% in 2026. However, S&P Global modeled various economic scenarios to assess the impact of potential US tariffs.
In a worst-case scenario, if the US imposed 25% tariffs on all EU imports, eurozone GDP growth would slow to 0.5% in 2025 and 1.2% in 2026. Such a development could prompt the European Central Bank (ECB) to cut interest rates multiple times this year and delay future hikes.
Discussing the newly announced 25% tariffs on cars and car parts, Broyer noted that S&P Global had already accounted for a 10% tariff of this kind in its forecast. He added that an extra 15% would have “a limited effect on the current figures.”
Germany is expected to bear the brunt of these tariffs due to its dependence on US car exports, which are approximately 1.5 times the European average. According to Broyer, this would “lower German output by 0.1% for 2025.”
Meanwhile, confidence in Europe is improving, driven by declining inflation, falling interest rates, and a resilient labor market. Planned fiscal stimulus, particularly in defence, is further boosting economic sentiment. EU member states are likely to agree on increasing defence spending by 1% of GDP from 2026, which could lift eurozone GDP by 0.1% in 2026, 0.2% in 2027, and 0.3% in 2028.
The UK is facing similar economic pressures. Even before the US car tariff announcement, S&P Global had revised down its 2025 UK growth forecast from 1.5% to 0.8%. This sharp reduction is attributed to persistent inflation, weak exports, and restrictive monetary policies.
According to Marion Amiot, Chief UK Economist at S&P Global Ratings, the newly announced 25% tariffs on UK car exports to the US could cause a 0.2% GDP decline. “Car exports to the US are the largest source of bilateral goods trade surplus for the UK,” she noted.
Additional trade challenges include weak demand in Europe and China, as well as a strong British pound, which is limiting UK exports—contributing 31% to GDP in 2024. Rising energy and labor costs are also weighing on businesses. “The energy prices are still twice as high today as they were before the energy crisis, so there are a lot of things they have to absorb,” Amiot explained.
One bright spot for the UK is the defence sector. As the fourth-largest defence exporter in Europe, the UK could benefit from the expected increase in EU military spending in the coming years.
