US Tariff Impact on Eurozone Growth

Investing.com — UBS economists warn that a 10% US tariff on all imports from the Eurozone could significantly affect growth.

These potential tariffs are part of a broader analysis on global trade tensions, emphasizing that their economic consequences largely depend on Europe’s response and other global tariff actions.

According to UBS, the direct GDP impact of a standalone 10% US tariff on the Eurozone may decline between 0.28 percentage points (pp) with full retaliation and 0.43 pp if the Eurozone does not retaliate. The GDP drag primarily comes from decreasing exports, which outbalance the effects on imports.

> "The nominal value of a 10% tariff on the Eurozone is about EUR30bn, or 0.2% GDP," the economists noted.

The forecasted economic impact on GDP, if tariffs target only Europe, could range from a 28 basis point drop with retaliation to a 43 basis point drop without it, driven largely by reduced exports.

Inflationary pressures arising from these tariffs hinge on Europe's actions. UBS indicates that retaliatory tariffs could elevate inflation by up to 13 basis points (bp) in consumer prices and 26 bp in the GDP deflator.

Without retaliation, inflation effects remain limited due to smaller import price changes and slight currency depreciation.

> "We estimate the inflation impact between -2bp and +26bp for the GDP deflator and between 1 to 13bp for CPI," the economists stated.

They explained that if Europe does not retaliate, the inflation effects largely depend on currency depreciation and economic weakness; however, retaliation would increase import prices and inflation.

In conjunction with broader US tariff increases, such as a 60% tariff on Chinese imports, the situation evolves. UBS notes that if the Chinese yuan (RMB) depreciates more significantly than other currencies due to higher US tariffs, it could alleviate the inflationary effects in Europe.

> "If RMB depreciates more than other currencies due to higher US tariffs, imports from China could become cheaper, neutralizing Europe’s own tariff inflation impact," the note stated.

Regarding domestic demand, UBS anticipates the effects to be relatively modest, with impacts ranging from -0.01 to -0.13 pp depending on retaliation.