The news: The EU lowered its growth expectations for this year and next, citing tariffs.

• The bloc now expects combined GDP to expand 0.9% in 2025, down 0.4 percentage points from its prior estimate.
• It anticipates an acceleration in 2026 to 1.4%, 0.2 percentage points lower than its initial forecast.

Zoom in: The EU’s forecasts are an attempt to quantify the impact tariffs will have on its economy—but, as our own updated forecasts emphasize, that’s a task easier said than done given the fluidity of the Trump administration’s economic policies. In the words of the EU’s economic commissioner, Valdis Dombrovskis, “The unpredictable and seemingly arbitrary rationale behind the US tariff announcements has raised uncertainty to levels not seen since the darkest moments of the COVID pandemic.”

As a result, there are plenty of caveats to the EU’s outlook, raising the possibility of a much sharper hit to its economy.

• The latest forecast assumes US tariffs on most EU imports remain at 10%—an optimistic view since negotiations between the two entities have so far been unproductive.
• It also assumes continued exemptions for pharmaceuticals, the bloc’s single largest category of exports, as well as for microprocessors.
• And, last but certainly not least, it assumes that the EU does not impose retaliatory tariffs—which, again, is optimistic since it has already threatened additional duties on up to €95 billion ($102 billion) of US exports in the event discussions turn sour, and is considering a digital services tax (DST) on US tech giants.

The bright side: The US’ protectionist policies have spurred European governments to increase defense spending, which should help blunt some of the impact of higher tariffs. Germany is also planning to spend €500 billion ($541 billion) on infrastructure upgrades, which could give the bloc’s largest economy a boost even as it grapples with the fallout from the auto tariffs.

Our take: The EU and US are each other’s largest trading partners for goods and services, making tariffs a considerable challenge for businesses on both sides of the Atlantic. Higher duties and uncertainty will push companies to delay investment and implement layoffs and other cost-cutting measures, which in turn will hurt economic growth and consumer sentiment.

Go further: Read our FAQ on the US-EU Trade War.