Has the momentum of European economic growth weakened substantially?

In the global economic landscape, the trajectory of the European economy has always been a subject of great concern. As we enter July, the European economy presents a multifaceted picture, facing numerous challenges and opportunities in terms of growth, trade, currency, and internal coordination.​

From the perspective of growth momentum, in the first quarter of 2025, both the euro zone and the EU's seasonally adjusted gross domestic product (GDP) grew by 0.6% compared with the previous quarter. At first glance, this shows a certain degree of economic vitality. However, an in-depth analysis reveals that the sustainability of this growth momentum is questionable. As an important trading partner of Europe, the sharp drop in U.S. import orders has cast a shadow over the European manufacturing cycle. The United States sharply increased imports at the beginning of the year due to concerns about tariffs, leading to a surge in European exports to the United States, which became an important factor for the strong economic growth in Europe in the first quarter. But this act of advance demand overdraft has led to a sharp decline in U.S. import orders now. Germany's export data in May is the best example. Its export decline exceeded expectations, with exports to the United States falling 7.7% month-on-month, totaling 12.1 billion euros, the lowest in three years. As an important engine of the European economy, Germany's poor export performance indicates that the overall European manufacturing industry is facing difficulties, and the driving force for economic growth is weakening. The European Commission's Spring 2025 Economic Outlook report also confirms this. Affected by the weakening global trade prospects and increased uncertainty in U.S. trade policies, the institution has significantly lowered its economic growth forecast for Europe, predicting that the EU's real gross domestic product (GDP) will grow by 1.1% in 2025, the euro zone by 0.9%, and the growth forecast for 2026 is also not optimistic.​

Trade agreements play a crucial role in Europe's economic growth in the second half of the year. Currently, the EU is in intensive negotiations with the United States on a trade agreement. Different directions of U.S.-EU trade negotiations will have distinct impacts on the European economy. If the two sides can reach an agreement, with Europe accepting a 10% tariff on exports to the United States and some specific tariffs being reduced or eliminated, although it will cause certain pressure on economic growth and corporate profits in the short term, the overall impact is manageable. In this scenario, European companies can maintain their exports to the U.S. market to a certain extent and continue to gain a share in U.S.-EU trade. However, if the negotiations break down, European exports to the United States will face high tariff barriers. If this happens, Europe's core industries such as automobiles, pharmaceuticals, and machinery will be severely hit. Eurostat data shows that pharmaceuticals, automobiles, and machinery products accounted for nearly half of the EU's exports to the United States in 2024. High tariffs will cause European automakers and machinery manufacturers to face losses in sales and investment. Many automakers' expansion or investment projects have been shelved, and some sales orders have been delayed, which may even trigger an economic recession. Currently, the United States imposes a 50% tariff on EU steel and aluminum products, a 25% tariff on the automotive sector, a 10% benchmark tariff on almost all other goods, and threatens to impose more tariffs on pharmaceuticals, semiconductors, copper, wood, critical minerals, and aviation parts, which undoubtedly adds significant pressure to U.S.-EU trade negotiations.​

In terms of monetary policy, the European Central Bank has room for further easing. Germany's 10-year government bond yield is -0.12%, a figure that reflects the flow of market funds and expectations for the economic outlook. There is market expectation of a rate cut by the European Central Bank in September. As European economic output slows and price pressures ease, it is reasonable for the European Central Bank to stimulate economic growth through loose monetary policies such as interest rate cuts. The overall inflation rate in the euro zone is expected to slow from 2.4% in 2024 to 2.1% in 2025 and to 1.7% in 2026. The inflation trend in the EU is similar, falling below 2% by 2026. The downward trend of inflation provides more flexibility for the European Central Bank's monetary policy operations. The European Central Bank has cut interest rates seven times in a row. If it cuts interest rates by another 25 basis points in September this year, it will help reduce corporate financing costs, stimulate investment and consumption, thereby injecting impetus into economic growth. However, due to significant differences among European Central Bank policymakers, the future path of monetary policy is full of uncertainty.​

There are obvious divisions within the EU regarding the acceptance of the terms of the trade agreement with the United States, which also brings variables to the future development of the European economy. German Chancellor Mertz urged the conclusion of an agreement. As a major exporting country, Germany's automobile and related industries are highly dependent on exports to the United States, and maintaining stable trade relations is crucial to German industries. Germany hopes to secure its related industries' exports to the United States through reaching an agreement with the United States and avoid the impact of high tariffs. French President Emmanuel Macron, on the other hand, stated that if the United States insists on maintaining a 10% tariff, the EU will definitely respond in kind. France is worried that making excessive concessions in the trade agreement will harm its own interests, especially in terms of agricultural market access and digital service regulations. In addition, some member state representatives warned that if the European side makes excessive concessions on key issues, it may have an impact on the EU's single market. These internal divisions make it difficult for the EU to form a unified and tough stance in trade negotiations with the United States, increasing the difficulty and uncertainty of the negotiations, and thus affecting the future development direction of the European economy.