EU set to slash 2026 growth forecast amid trade tensions

The European Union will reduce its growth forecasts for 2026 as trade disagreements persist, alongside weak economic performance by its largest member countries and political upheaval. 

The revised outlook, due to be released next week, indicates that Europe’s recovery is much shakier than officials had anticipated. EU officials say increasing U.S. tariffs and unresolved trade disputes are now the top obstacles to growth. The Trump administration’s tariff measures, introduced last year, continue to affect European exporters, particularly in manufacturing-dominated sectors such as steel, machinery, and automobiles.

Brussels had expected pressures to abate by 2026, but had also anticipated a modest recovery. Previous estimates put growth at around 1.4%. That estimate is now expected to be drastically lower, reflecting the cumulative impact of trade barriers and investor risk. The jolts from U.S.-EU trade tensions are also giving businesses pause. Local companies are deferring investments amid fears about market access, supply chain risks, and the uncertainty of tariffs. 

Emerging global competition, a stronger euro, and a downturn in foreign demand are also contributing to headwinds for the export outlook. The uncertainty itself, economists say, is now one of Europe’s most serious economic threats, as opposed to the tariffs alone. Confidence has declined, supply-chain planning has become more difficult, and the specter of further escalation in trade looms over every forecast.

Major economies lose momentum

Germany, the EU’s largest economy, is experiencing a particularly challenging time. Yet despite expanding public spending on defense and infrastructure, the nation’s recovery has lagged. Industrial production has struggled to gain traction, and Germany’s chronic competitiveness woes have taken root. What was counted on to be Germany’s best post-pandemic year of growth has now become just another disappointing cycle.

The country’s Council of Economic Experts recently cut its 2026 growth forecasts to 1%, citing weaker global demand and higher production costs. France, the bloc’s second-largest economy, faces a different challenge. Growth has proven resilient, but political instability is weighing on consumer and investor confidence.

An estimated half-percentage point of France’s growth for the year is being cut by uncertainty, including domestic political disputes and budget tensions, according to analysts. Across the region, policymakers are also issuing warnings about structural risks, including rising energy costs, demographic shifts, and widening innovation gaps compared to the United States and certain parts of Asia. 

The European Central Bank has already moved to help prop up the struggling economy. It has cut interest rates several times this year, aiming to stabilize credit conditions and stimulate investment. However, ECB officials recognize that monetary policy alone cannot alleviate the weight of drag caused by external trade pressures.

In its latest assessment, the ECB stated that ‘elevated uncertainty, high effective tariffs and tightening global competition’ remain key issues that impede Europe’s recovery momentum.

Business investment is weak, and exports are not expected to recover overnight without a deceleration of global tensions. Fiscal policy, on the other hand, is stretched.

Policy responds, but risks stay high 

A handful of member countries, including Italy, made strides in stabilizing public finances; others, such as France, are expected to post some of the largest deficits in the euro area. Divergent budget approaches can compromise the EU’s ability to forge a coordinated, strong collective response.

EU leaders today are seeking to strike the right balance between the need to bolster domestic competitiveness and the complexities of the geopolitical environment. For the bloc, this means working to boost investment in technology, clean energy, industrial resilience, and other areas to shield the bloc from external shocks.

Politically, Brussels continues to pursue stability in trade relations with Washington. Any easing of tariff pressures or steps toward new deals could quickly boost the economic outlook.

However, officials warn that the threat of new trade disputes is “high,” and that Europe would need to prepare for a prolonged era of global fragmentation.

By now, the message from Europe’s institutions is clearer than ever: the recovery is slowing, trade pressures are growing, and without a decisive response, growth prospects for the region will continue to fade into 2026.

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