The growth outlook for the euro area indicates potential weakening even after a strong start in the first quarter. The growth forecast for 2025 remains at 0.8%. Risks of recession are rising due to trade uncertainties, which are also affecting projections for 2026 and 2027. In the short term, growth in the euro area may slow because of US tariffs impacting export demand. Ongoing tariff issues between the US and EU could lead to different rates, further hindering economic growth. However, increased trade with other regions is expected to lessen the long-term effects of these tariffs.

Revised Growth Forecasts

The growth forecast for 2026 has been revised down to 1.0%, from a previous estimate of 1.2%. This change reflects ongoing trade issues. On the other hand, the forecast for 2027 has increased to 1.6%, up from 1.1%. This increase is fueled by fiscal boosts and defense spending, particularly in Germany. These forecasts consider ongoing uncertainties. While challenges may arise in the short term, there’s potential for recovery in later years. Adjustments in trade strategies and increased government spending are expected to support better growth by 2027. It’s becoming evident that economic momentum in the euro area faces pressure—not from internal weaknesses, but from external disruptions caused by global trade tensions. A strong performance earlier in the year hasn’t been enough to ease concerns about an ongoing slowdown. The flat forecast of 0.8% for 2025 highlights lowered confidence, especially as recession signs emerge due to shifting trade dynamics.

2026 and 2027 Economic Shift

The updated forecast for 2026, now at 1.0%, reflects the impact of changing US tariff policies. We are experiencing lowered expectations for export demand, which also indirectly affects business investment. Currency positions might need adjustments. For those with longer-term investments, reduced optimism about output growth could affect euro-based yield curves and risk pricing. Looking ahead, there is a significant shift. The revised estimate for 2027 now suggests 1.6% growth, indicating that fiscal measures—mainly defense spending in Germany—could start to counter the negative effects caused by trade disruptions. This adjustment acts as a delayed response, with public budgets compensating for the weaker private sector trade activity. It’s essential to note that there’s a time lag between budget allocation and its impact on spending, which could influence market volatility. This potential for long-term growth improvement is conditional. It relies not only on domestic actions but also on the assumption that other global tensions do not escalate. If protectionism increases or if global markets do not grow as anticipated, positive outcomes could quickly reverse. Past scenarios have shown us the risks of underperformance. In the short term, caution is essential. Strategies anticipating rate changes or inflation convergence across the region should include hedges, especially given the ongoing fiscal and political divergences among member states. Adjusting positions holds risks that the market has not yet fully accounted for. Current indicators, like PMI composites and export orders, remain steady. Monitoring these trends post-summer will be crucial. Regarding duration, there might be a case for shifting slightly toward longer-term investments as 2027’s expectations firm up. However, this opportunity is limited and depends on timely fiscal action, particularly in Germany. Presently, spreads are largely stable, with the implied risk premium steady. This stability helps but does not eliminate potential volatility. The key takeaway is that correlations between different sectors may not hold in the short term. We are not seeing a cyclical upswing across the region. Cross-asset positioning should reflect a broader range of possible outcomes, including risks from slower-than-expected fiscal implementation. Traders who are not prepared for these future scenarios—both positive and negative—may find themselves unbalanced in monthly adjustments. Create your live VT Markets account and start trading now.

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