Navigating the EU/US Tariff Disruption: Economic and Credit Market Implications

Explore the 2025 EU/US tariffs showdown and its far-reaching impacts on Europe’s economic landscape. Stay ahead with key insights on inflation trends, monetary policy shifts, and the upcoming July 8 trade negotiations shaping the future of global commerce.

Webinar Overview

​The webinar, moderated by Carla De Velasco, featured presentations from:

• Sylvain Broyer, Chief Economist EMEA, S&P Global Ratings.
• Paul Watters, Head of European Credit Research, S&P Global Ratings
• Baird Snyder, Head of New Product Development, S&P Global Market Intelligence.

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Economic Consequences and Policy Responses

Sylvain Broyer presented a detailed macroeconomic outlook. He highlighted a significant global slowdown primarily affecting China and the United States.

Global Trade Slowdown and Inflationary Pressures

• U.S. import taxes are now six times higher than they were in 2024. This is contributing significantly to the slowdown.
• The Eurozone’s growth is expected to remain subdued in 2025 and 2026. A recovery is anticipated from 2027. This recovery will be driven by Germany’s substantial fiscal stimulus and increased defense spending across the continent.
• China is expected to return to deflation. U.S. inflation could rise to 3.6% in 2025. This would delay any Federal Reserve rate cuts until the fourth quarter.
• Eurozone inflation is projected to remain around 2%. Inflation in the U.K. is expected to be slightly higher.
• Key risks to this outlook include the expansive German fiscal stimulus and potential trade retaliation from the European Commission against U.S. tariffs.

Economic Impact of Tariffs

• The direct impact of tariffs on Europe’s GDP is relatively modest. The reduction is estimated at 0.4% for the Eurozone and 0.2% for the U.K.
• Germany is particularly exposed through its auto industry and faces a GDP reduction of around 0.4%. Smaller economies like Ireland and Switzerland are more vulnerable.
• The pharmaceutical sector is also highly exposed. Exports were front-loaded before tariff hikes.
• A contraction in Eurozone GDP is expected in Q2. Consumer confidence continues to decline.

German Fiscal Stimulus and Structural Reforms

• The German government’s announced stimulus could reach 20% of GDP over 12 years. Projected GDP boosts are 0.5% in 2026, 0.7% in 2027, and 0.9% in 2028. This could provide positive spillover effects for Eastern Europe.
• However, the success of this stimulus depends on the implementation of structural reforms. Regulatory burdens must be reduced to enhance competitiveness.

Labor Market and Monetary Policy

• The labor market across Europe remains resilient. Job numbers are at record highs, and unemployment remains low despite a cooling in hiring.
• This labor market strength limits the need for aggressive monetary policy interventions. The ECB is expected to cut rates once more. The Bank of England is projected to cut rates twice in 2025.​

​Credit Market Perspective

Paul Watters provided a credit market perspective. He emphasized that the 10% universal tariff is generally manageable. However, the 25% strategic tariffs on steel, autos, pharmaceuticals, and semiconductors pose significant risks.

Indirect Tariff Impacts

• Indirect effects of tariffs, such as market trust erosion and financing stress, are considered more severe than direct costs.

Sectoral Impacts

• In the chemicals and capital goods sectors, large firms like BASF are buffered by their U.S. production hubs. However, 60% of chemical demand in Europe remains tied to the automotive, machinery, and electronics sectors. This exposes them to further risks.
• For pharmaceuticals, a 20% tariff is deemed manageable due to high margins. Ireland faces significant exposure due to its dependence on tax revenues from pharmaceutical exports.

Automotive Industry Impacts

• The auto industry has already been directly affected by the 25% tariffs effective since April 3, 2025. Global light vehicle sales forecasts have been downgraded to -2% in 2025 and between 0% and -2% in 2026.
• OEMs like Volvo, Audi, and Stellantis are considering relocating production to the U.S. However, they await clearer U.S. policy decisions before proceeding.

Credit Ratings and Sectoral Pressures

• In terms of credit ratings, Slovakia’s sovereign rating was downgraded to A+ with a negative outlook. This is due to its heavy reliance on the auto sector.
• The sectors facing the most pressure include autos, chemicals, and metals/mining.

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​Conclusion and Strategic Recommendations

• Credit markets remain resilient. Certain sectors face growing pressures from both direct and indirect tariff effects.
• The direct GDP impact of tariffs remains moderate. However, the broader uncertainty heavily impacts investment decisions and consumer confidence.​
• Germany’s fiscal stimulus offers a recovery path. Yet, it requires complementary structural reforms to ensure long-term success.
• Key next steps include monitoring the July 8, 2025, tariff negotiations closely. Tracking sector-specific credit ratings, especially in the automotive and chemical industries, is critical.

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