On Sunday 27 July came the news a trade deal had been struck between the US and the EU with a 15% tariff on most goods the US imports from the EU. While European leaders acknowledged the accord would hinder the economy, it is a much better outcome than the 30% tariff which US President Donald Trump had threatened.
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The 15% tariff adds 10% to the 4.8% average US tariff on imports from the EU that prevailed before ‘Liberation Day’. The agreement removes the risk of a trade war, which would have damaged Europe’s near-term economic prospects, and it reduces uncertainty for businesses in both the eurozone and the US.
Main points of the US-EU trade deal
- A single 15% US tariff on most imports from the EU, including cars, semiconductors and — at least initially — pharmaceuticals.
- A higher 50% tariff remains on US steel and aluminium imports, but only above certain quotas for imports from the EU. The EU and US are to work together to reduce global overcapacity.
- ‘Zero for zero’ mutual tariffs on strategic products including aerospace components, some chemicals, certain agricultural products as well as critical raw materials.
- EU will replace imports of Russian gas and oil by significant purchases of US liquid natural gas and nuclear fuels ($250bn/year for the next three years). The EU is to buy US artificial intelligence (AI) chips and significant amounts of US military equipment and invest an additional $600bn in the US.
It should be noted that initial reports on the deal differ on some of the details, especially as to the precise treatment of metals and pharmaceutical products.
So? Clearly a negative for growth
While the removal of most of the uncertainty over the terms of trade between Europe and the US is a positive, there is no getting away from the fact that the outcome is much worse for Europe than the situation before President Trump started this new round of trade wars in April.
These tariffs will have negative economic consequences for both the US and the EU. The trade tensions with the US will likely subtract a cumulative 0.4% from European growth in 2025 and 2026 taken together, while US corporations will pay more for imported goods. Fortunately, the sizeable fiscal stimulus announced by Germany should offset this for the eurozone, while cuts to corporate taxes in the One Big Beautiful Bill partly compensate US companies.
The US is only one of many export markets for the eurozone, so the damage to eurozone trend growth, which can be estimated at around 1.2%, should be relatively small.
For the US, higher tariffs on imports from almost all its markets will likely show up in higher prices for US consumers. Inventories built up ahead of the tariffs should soon be largely depleted and importers cannot be expected to absorb major hits to their margins indefinitely.
According to the World Bank, in 2024, the US imported goods worth $606bn from the EU, equivalent to 2.1% of US GDP. The eurozone exported goods worth €480bn to the US. That represented 17% of the region’s goods exports and 3.2% of its GDP.
It is possible that the tariffs lead to a global shift towards greater dependence on China and less on the US.
This week, financial markets reacted modestly to the news of the deal. US and European stock indices were little changed (see Exhibit 1).
This reaction could be explained by the fact that markets tend to weigh the short term more than the long term, taking into account only those elements that can be quantified relatively precisely rather than speculating on the potential significance of structural changes and trends.
What matters for the moment is the measurable short-term impact of the 15% tariffs: while negative, it appears manageable. This outcome beats prolonged uncertainty or a full-blown trade war.
Second-quarter eurozone growth — Better than expected
The eurozone economy unexpectedly expanded by 0.1% in the second quarter despite the global trade tensions, according to a flash estimate released on 30 July. The data follows the outsized 0.6% quarter-on-quarter surge in eurozone GDP in the first quarter. Relative to consensus market forecasts of zero growth, this is a positive result.
The headline data shows the eurozone economy grew by a cumulative 0.7% in the first half of 2025, which, on an annualised basis, would be slightly above the 1.2% trend rate of growth.
The data should, however, be treated with some caution as the peculiarities of Irish accounting methods for intellectual property transactions between Irish subsidiaries of US tech and pharma giants and their US-based headquarters in the GDP statistics inflated first-quarter eurozone growth by around 0.2%.
Front-loading of exports ahead of US tariffs raised eurozone GDP by a similar amount in early 2025. In the second quarter, these special effects began to unwind as Irish GDP fell by 1% quarter-on-quarter after surging by 7.4% in the first quarter, while net exports subtracted from eurozone growth after contributing 0.3% to growth in early 2025.
The fact that eurozone GDP still edged up in the second quarter points to some underlying positive momentum.
Overall, this data provides no compelling reason for the European Central Bank (ECB) to cut its key interest rates further. As widely expected, the ECB kept rates unchanged at the policy meeting on 24 July. The tone of the policy statement was broadly unchanged compared to June. ECB President Lagarde dismissed the six quarters of inflation undershooting its target that the ECB forecasts between now and 2026 as a ‘minor deviation’.
The ECB is now on its summer break until September when its next set of forecasts will be important in assessing where the central bank stands on this ‘minor deviation’. Markets consider the chances of a rate cut in September are now a touch lower than prior to the July meeting.
The ECB is understandably likely to wait for as long as it can for confirmation that the inflation undershoot is a temporary phenomenon. In our view, central bankers could quickly change their tune if they perceive that the risks of a more persistent undershoot have become material.
In response to this week’s events, the euro has fallen slightly against the US dollar in currency markets. We see this a temporary correction in the euro’s strengthening trend.
US growth surprises to the upside
A reversal of the import surge at the start of the year led to a recovery in US GDP growth in the second quarter following a slight contraction in the first quarter.
Real GDP rose by 3% quarter-on-quarter — above the consensus estimate of 2%. Since the start of 2025, US economic activity has expanded by 1.2% on an annualised basis, much slower than last year’s first-half surge of 2.3%.
This softer growth path seems likely to persist because of the administration’s clampdown on immigration, its trade wars and uncertainty over the economy’s capacity to weather tariffs.
Significant swings in import volumes since President Trump took office again in January distorted headline GDP figures in the first half of 2025. This makes it harder to get a ‘clean read’ of the economy. Peering through the volatility in these components, private final sales (also-known-as ‘core’ GDP) rose by 1.2%, after 1.9% in the first quarter, meaning it has averaged 1.6% (annualised) in the first half of 2025.
That’s a clear step down from the exceptional pace it was running at in 2023 and 2024, but it is by no means weak: for comparison, the Federal Reserve thinks that trend growth is 1.8%, so this is right in that ballpark.
Given the lag and volatility in GDP data, the Fed will probably stay focused on the state of the labour market, and particularly the unemployment rate, in assessing the health of the economy. The US has so far proved relatively resilient and we do not anticipate any major deterioration in the short term.
No surprise from the Fed
As widely expected, US policymakers held the key federalfunds rate at 4.25-4.50% for the fifth consecutive meeting on 30 July. There was no surprise in seeing both Trump appointees Fed Governors Christopher Waller and Michelle Bowman dissent and vote for a 25bp cut — though it is the first time since 1993 that two governors opposed the consensus decision.
Ahead of the meeting, futures and swaps markets had priced in close to 60% odds of a September rate cut and fewer than two cuts by year-end. As Chair Jerome Powell’s press conference ended, the odds of a September cut had fallen to less than 50%, with still fewer than two cuts priced in for the remainder of 2025.
The Fed statement reiterated its view that the labour market is doing just fine and that inflation remains at above target. However, it removed the phrase “uncertainty about the economic outlook has diminished” and instead noted that uncertainty remains elevated — a modestly hawkish shift in tone.
The statement also noted that economic growth had moderated in the first half, in contrast to the June statement, which had described economic activity as expanding at a solid pace.
Before their next meeting on 16-17 September, Fed policymakers will get a chance to see both the July and August inflation and employment reports.
