Europe saw stronger growth at start of year, but Trump's tariffs have darkened outlook

FRANKFURT, Germany (AP) — Europe’s economy grew more strongly in the first three months of the year, only to see hopes for an ongoing recovery quickly squelched by U.S. President Donald Trump’s trade war.

Gross domestic product in the 20 eurozone countries grew 0.4% in the first quarter, improving on 0.2% growth in the last part of 2024, according to official figures released Wednesday by European Union statistics agency Eurostat.

But on April 2, just two days after the end of the quarter, Trump announced an onslaught of new tariffs on almost every U.S. trading partner and hit goods imported from the EU with a 20% tariff rate. That has led to widespread downgrading of Europe’s growth outlook for the year since its economy is heavily dependent on exports and the U.S. is its largest single export destination.

Although Trump has announced a 90-day pause on what he calls his “reciprocal” tariffs — so named because they are based on how he feels other countries have been treating the U.S. —prospects that the EU can strike a bargain to reduce the 20% figure are highly uncertain.

Meanwhile, other tariffs — such as a 25% rate on steel and aluminum and on cars, both of them for all trading partners, including Europe, remain in place. The costs of tariffs are paid by the companies that import European goods such as cars and pharmaceuticals, which then have to decide whether to swallow the costs or pass them on to the consumer in the form of higher prices.

As a result, indicators of business and consumer optimism in Europe have fallen. The European Commission’s economic sentiment indicator sagged to 93.6 in March, its lowest level since December. That drop in sentiment is “another illustration of how the last four weeks of tariff tensions and uncertainty have entirely wiped out the tentative return of optimism in the eurozone,” said Carsten Brzeski, global head of macro at ING bank.

“Unless there are major changes in U.S. trade policy, sentiment as well as economic activity in the eurozone will remain subdued over the coming months," Brzeski said.

Before Trump's announcement, hopeful signs had included a strong job market, with unemployment low at 6.1% and consumers beginning to spend more after several years of holding back because of inflation.

With inflation down to 2.2%, the European Central Bank has been lowering the cost of credit for consumers and businesses by cutting its benchmark interest rate seven times in its current easing cycle, most recently by a quarter of a percentage point on April 17.

On top of that, the German parliament has approved a 500-billion euro ($570 billion) investment fund that’s exempt from the country’s constitutional limits on debt. That decision by the incoming coalition of the center-right Union bloc and the Social Democrats has raised hopes of additional spending on pro-growth infrastructure over the coming years.

However, Trump’s tariffs have lowered expectations for Germany, the eurozone’s largest economy and its economic problem child. The outgoing government under Chancellor Olaf Scholz lowered its growth estimate for this year to zero after two previous years of declining output. Parliament is expected to elect center-right Union leader Friedrich Merz as chancellor on May 6 in the wake of a Feb. 23 national election.