00:13. Introduction
02:28. What is the main impact of the recent US tariff announcements on the global economy?
03:46. Can Europe withstand this tariff shock?
04:20. I assume you're referring to the German investment and the rearmament effort expected at European level?
06:02. What are your growth forecasts?
07:37. Now let's move on to inflation: is the same convergence scenario expected?
09:42. Converging growth rates, diverging inflation trajectories: what does this mean for monetary policy? The task seems more complicated for the US Federal Reserve than for the European Central Bank, doesn't it?
12:55. What can you tell us about the risks associated with these forecasts, firstly for the United States and secondly for the eurozone?
17:54. Conclusion
Marianne Mueller:
Three times a year, the Advanced Economies team of the Economic Research department publishes its EcoPerspectives. This is an opportunity to take stock of the situation in the major advanced economies, - namely the United States, the Eurozone and its main member countries, the United Kingdom and Japan - and in particular to update their growth forecasts in the light of specific risks.
I'm Marianne Mueller, Economist for Europe in charge of Germany, and we are joined today by Hélène Baudchon, Deputy Chief Economist and Head of Macroeconomic Research, and Lucie Barette, Economist for Europe in charge of Southern Europe.
News - Signs of de-escalation in the news
The economic news at the beginning of the year has been dominated, if not overshadowed, by Donald Trump's announcements of new and significantly higher tariffs on imports of goods into the United States.
Several countries have acted proactively to avoid escalation or to put an end to it, as in the most recent example of China. In this context, the United States has decided to suspend the entry into force of additional "reciprocal" customs duties for 90 days, and to use this time to conclude any bilateral agreements. In the meantime, it is important to bear in mind that customs duties, while they have come down from their peaks, remain at significantly higher levels than before Trump's return to the White House. Moreover, uncertainty remains very high, as a result of which the downside risks to activity persist.
In this new Podcast, we take a look at the short- to medium-term economic outlook for the major advanced economies, analysing the impact of trade tensions, the room for manoeuvre available and the expected economic dynamics.
My first question is for you, Hélène: what is the main impact of the recent US tariff announcements on the global economy?
Hélène Baudchon:
Although it is difficult to anticipate all the consequences, in both the short and long term, there is no doubt that these announcements will have negative effects, primarily for the United States. Generally speaking, the tariffs announced are likely to lead at the very least to a slowdown in global demand and to a reorganisation of trade links and international supply chains in order to provide the best possible protection against the shock of US tariffs, with potentially lasting effects on trade flows. The erratic and unpredictable nature of the announcements is also fuelling global uncertainty. Although there are signs that trade tensions are gradually easing (notably with the 90-day pause announced by Donald Trump on 9 April, the agreement recently signed with the United Kingdom, and another 90-day pause negotiated with China on 12 May), the context remains extremely uncertain, with major and lasting negative effects on activity.
Marianne Mueller:
Lucie, my first question to you is a general, but a very important one: can Europe withstand this tariff shock?
Lucie Barette:
Yes, absolutely, the European bloc seems to be relatively well positioned to withstand the negative shock coming from the United States, for three main reasons:
Firstly, its budgetary flexibility at European Union level
Secondly, its room for manoeuvre in terms of monetary policy
Thirdly, its ability (and willingness) stimulate domestic demand through investment
Marianne Mueller:
I assume you're referring to the German investment and the rearmament effort expected at European level?
Lucie Barette:
Yes, exactly. Generally speaking, even if this significant increase in defence spending in Europe will take time to materialise, it should boost confidence in the short term.
It should also offer new opportunities to sectors facing declining demand in their traditional markets. Germany, in particular, will be able to reorganise its industry by relying on its strategic sectors and transferring production capacity from struggling sectors (such as automotive and chemicals) to its stronger ones (such as military equipment, metals or electrical and electronic equipment).
Ultimately, this redeployment should have a positive impact on European growth in the medium term, without adding inflationary pressure.
Marianne Mueller:
What are your growth forecasts?
Hélène Baudchon:
I'm going to start by presenting those for the US economy, mentioning first the sudden reappearance of the risk of a recession, which we believe has a 25% probability of occurring. This is therefore not the central scenario we have adopted: which anticipates a sharp slowdown in US growth, falling to an annual average of 1.3% in 2025 and 1.2% in 2026 (note that this forecast for 2026 has been adjusted slightly upwards compared to what was published in our EcoPerspectives, following the publication of the figures for the first quarter). The US economy would escape recession on the optimistic assumption of tariff de-escalation (which appears likely, as mentioned in the introduction), accompanied by less uncertainty (a condition that is at least as important as de-escalation). Otherwise, recession would become the most likely scenario.
On the other side of the Pacific, let's look at what's happening in Japan: the country is heavily exposed to the United States, which is the primary destination for Japanese exports of goods (and China is the second largest destination). As a result, we have lowered our forecast for 2025 to 0.7%. For 2026, we expect growth of 0.2%.
Marianne Mueller:
Lucie, what are the forecasts for Europe?
Lucie Barette:
In the Eurozone, before April 2 (which is the “Liberation Day” and the date of the shock announcement of 'reciprocal' tariffs), the economic outlook had improved due to the the previously mentioned announcements of future increases in military spending in Europe. This is a significant factor in supporting growth, fuelled also by the feeling that the European Union's calls for action have been heard.
Nevertheless, the worsening of the post-Liberation Day tariff shock has led us to revise our growth scenario for Europe. In the short term, the impact of higher US tariffs is likely to have a greater negative impact on European growth than the gains from increased defence investment and the knock-on effects between countries, as these gains will take longer to be felt.
As a result, we are forecasting growth of 1.1% in 2025 in the Eurozone (this figure is slightly higher than that presented in Eco Perspectives, as it takes into account the good growth figure for the first quarter of 2025).
However, a (slight) improvement is still expected between 2025 and 2026, despite the US slowdown, thanks to the rise in defence spending in Europe and the German investment plan.
For 2026, we therefore expect growth of 1.2% (compared with 1.3% in EcoPerspectives), which is similar to the growth rate expected for the US. This is noteworthy. This expected convergence in growth rates between the US and the eurozone by 2026 is an important feature of our scenario.
Finally, for the United Kingdom, average annual growth is slightly lower, but relatively less than in the eurozone, as the country has been less sanctioned than its European neighbours. We therefore anticipate growth of 1.0% in 2025 and 0.8% in 2026.
Marianne Mueller:
Thank you for this overview of the growth outlook. Now let's move on to inflation: is the same convergence scenario expected?
Hélène Baudchon:
Not at all! And this is another important marker for our forecasts. The current outlook for inflation on both sides of the Atlantic is very divergent.
According to our forecasts, US inflation will visibly start to pick up from the third quarter of 2025, peaking at 4% in the second quarter of 2026. On average, inflation would rise to 3.1% in 2025 and almost 4% in 2026. This increase is a direct consequence of the tariff shock. In our forecasts, it is not the result of a self-sustaining inflationary mechanism as in 2021-2023: from this perspective, it is temporary in nature. Nevertheless, a more pronounced slowdown in the US economy, or even a recession, could help to moderate this inflation bump. Similarly, the current fall in oil prices is a favourable development that will push down US inflation, at least in the short term.
Lucie Barette:
I'll take over from Hélène to continue with the eurozone.
We still expect disinflation to continue and a return to the 2% target.
The domestic components are disinflationary.
And on the non-domestic side, inflation imported from the US, and the extra costs arising from friction and the reorganisation of supply chains, should be offset by one the strengthening of the euro against the dollar, two the absence of any major retaliatory measures, and three disinflation, or even deflation, imported from China.
In 2026, according to our forecasts, headline inflation will even fall slightly below 2% on an annual average.
Marianne Mueller:
Converging growth rates, diverging inflation trajectories: what does this mean for monetary policy? The task seems more complicated for the US Federal Reserve than for the European Central Bank, doesn't it?
Hélène Baudchon:
Yes indeed, and this leads us to anticipate divergent monetary policy developments on both sides of the Atlantic.
On the US side, the Fed has to navigate between upward risks to inflation and downward risks to growth, and has to manage a stagflation-type situation. In our scenario, these two risks cancel each other out and we believe that the Fed has no choice but to maintain the status quo on monetary policy, which it would extend until the end of this year. The risk of a de-anchoring of inflation expectations also comes into play and explains why we believe that the Fed will not ignore the expected rise in inflation and cut rates in response to the slowdown in activity. As long as the slowdown remains contained, it does not call for rate cuts. In 2026, however, the Fed would be in a position to resume rate cuts, as the inflation-growth trade-off shifts in favour of the latter.
Lucie Barette:
Compared to what Hélène just said about the difficulty of the Fed's task, for the European Central Bank, the situation is more favourable both in terms of inflation and growth, and the conditions remain in place for further rate cuts in the short term.
We continue to anticipate two further cuts, in June and July, of 25 basis points each, to reach a terminal rate of 1.75% in July.
In 2026, however, in the second half of the year, the expected strengthening of growth, combined with the inflationary nature of the rearmament effort, would lead the ECB to raise its rates by 50 basis points according to our forecasts, which would accentuate the decoupling from the Fed.
In the United Kingdom, the Bank of England faces a more complex situation, as inflation is higher and the economic situation is difficult. According to our forecasts, this would lead the BoE to continue its easing at a slow pace of one cut per quarter, spreading it out until early 2026.
Finally, the Bank of Japan, which has been very cautious in raising its key rates, would move closer to its peers by pausing this adjustment for the rest of the year.
This would therefore be a status quo like the Fed, but for different reasons: in Japan, concerns about growth are predominant. Once these concerns have passed, the Bank of Japan is expected to resume its cautious rate hikes in 2026.
Marianne Mueller:
To conclude this discussion, what can you tell us about the risks associated with these forecasts, firstly for the United States and secondly for the eurozone?
Hélène Baudchon:
Well, in the United States, the tariff shock and the associated climate of uncertainty and financial volatility are fuelling the risk of recession, which we have already mentioned, particularly by weighing on confidence and investment and hiring intentions. We believe that downside risks are prevailing, but we cannot rule out a more favourable scenario, thanks to the good initial start of the US economy and in the event of a greater-than-expected easing of tariffs. The Trump administration's plans for tax cuts could also support growth (provided, however, that they do not create too much additional pressure on long-term interest rates, given the scale of the US budget deficit).
Lucie Barette:
In the Eurozone, we can identify upside risks to inflation: according to our scenario, as growth strengthens, supply constraints could reappear and put upward pressure on inflation.
Moreover, although the German fiscal turnaround and rearmament efforts in Europe should stimulate growth, they are not without their difficulties.
In addition to the challenge of implementing them as quickly as possible, they are colliding with a major budgetary challenge: that of reconciling and finding a balance between several current priorities: increased public spending on defence, investment in the energy transition, and expenditure related to the ageing population.
All of this will be done against a backdrop of higher interest rates, with many countries still having high ratios of public debt to GDP, and limited growth prospects in most of these countries, and elsewhere.
There is therefore a clear incentive not to relax budgetary discipline in those countries, where budgetary imbalances are more significant, by reducing primary deficits.
The challenges are considerable, but we believe that Europe will rise to them and emerge stronger from this ordeal.
Marianne Mueller:
Thank you very much, Hélène and Lucie. We thus retain for this quarter the two major turning points: on the negative side, the neo-protectionist shock of the US tariffs and, on the positive side, the European rearmament and investment efforts. The only certainty is the uncertainty surrounding their repercussions. But major changes are likely to be underway, and your team will be keeping a close eye on them. We invite our listeners to follow the future developments on our website.
Thank you for following us, and see you soon for another podcast.
Reading advice :
Sound credit :
- Extact from the speech of Pierre-Olivier Gourinchas, chief economist at the IMF, during the IMF World Economic Outlook' press briefing, April 2025.
# Press Briefing: World Economic Outlook, April 2025 - YouTube
- Extract from Jérome Powell's speech at the May 7, 2025 FOMC press conference.
# FOMC Press Conference May 7, 2025
- Extact from the speech by Christine Lagarde, Président of the ECB, at the announcement of the ECB's latest monetary policy decisions, April 17, 2025.
# President Lagarde presents the latest monetary policy decisions – 17 April 2025
