Trump’s tariffs could derail Europe’s 2025 growth, warn Goldman Sachs, JPMorgan

NEW YORK: Top Wall Street analysts are warning that potential tariffs imposed by President Donald Trump could significantly impact Europe’s economic growth, with investment bank Goldman Sachs projecting a eurozone GDP increase of only 0.7 percent in 2025. This forecast falls below the latest estimates from the European Central Bank (ECB) and the overall consensus prediction of 1 percent. Key sectors such as automobiles and pharmaceuticals are particularly vulnerable, and while a weakening euro might provide some mitigative effects, the relief could be limited.

A new wave of trade uncertainty threatens to disrupt Europe’s already sluggish economy, prompting leading US investment banks to express concerns about the implications of impending tariffs from Trump’s administration. Analysts at Goldman Sachs and JPMorgan have emphasized that the combination of tariffs and potential retaliatory measures from Europe could considerably affect the eurozone’s economic prospects.

Although the EU was not targeted in the first round of US tariffs affecting countries like Mexico, Canada, and China, Trump has indicated that the EU, due to its sizable trade surplus with the US, may soon be at risk.

Assessing the Potential Impact of Tariffs

Goldman Sachs anticipates that a 10% tariff on all imports from the EU to the US, if fully retaliated against, could erode euro area growth by up to one percentage point. The bank’s analysts predict a mere 3 percent growth in European earnings per share for 2025, starkly contrasting with an 8 percent bottom-up consensus expected from corporate earnings.

According to Sven Jari Stehn, Goldman Sachs’ chief European economist, it’s not just the tariffs themselves that carry weight, but the underlying trade uncertainty that could dampen economic growth and investment sentiment.

Identifying the Most Affected Sectors

The EU contributes roughly 15 percent of total US imports, with machinery, pharmaceuticals, and chemicals being among its top exports. Other significant industries, including automotive, metals, and technology, also face considerable exposure to tariffs. Goldman Sachs suggests that sectors characterized by high margins, such as healthcare, may be somewhat insulated from trade uncertainties, while cyclical sectors like automotive manufacturing are especially vulnerable.

Also read: Christine Lagarde warns of potential US trade policy shifts, calls for economic reforms at Davos

A group of large-cap European stocks known as “GRANOLAS” (which includes prominent companies like GSK, Roche, ASML, Nestlé, Novartis, and others) has struggled recently but typically performs well during periods of trade policy uncertainty.

Will a Weaker Euro Mitigate Effects?

A falling euro may provide some advantage for European companies with extensive global revenue, but the relationship between currency depreciation and European stock performance is complex. Goldman Sachs’ foreign exchange analysts project the EUR/USD exchange rate to drop to 0.97 within the next year, while GBP/USD could fall to 1.20.

Typically, a strong US dollar is linked to weaker performance in non-US markets, as dollar-based investors in European equities see diminished returns unless they hedge against currency shifts. The analysts caution that a depreciating euro might also lead to an increased risk premium, nullifying any benefits derived from currency movements.

Europe’s Potential Retaliation Strategy

Uncertainty looms regarding how the EU may respond to any new US tariffs. JPMorgan economist Nora Szentivanyi points out that the motivations, objectives, timing, and specifics of tariff impositions are unclear, but the European Commission has committed to retaliate firmly against any US tariffs. If the EU adheres to its 2018 strategy, it may target tariffs towards goods that significantly affect Trump’s voter demographic, while possibly refraining from taxing energy products.

JPMorgan has already accounted for a 0.5 percentage-point drag on annualized growth over the next four quarters due to increased trade uncertainty. However, Szentivanyi indicates that new tariff threats coupled with sluggish euro area growth could further adversely impact the region’s economic trajectory.

On Tuesday, US Treasury Secretary Scott Bessent met with ECB President Christine Lagarde to discuss economic priorities and collaboration between the US and EU, reflecting the growing concern surrounding US-EU trade tensions as financial markets await additional insight into the US’s trade policy direction.