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Donald Trump’s return to the White House will exact a heavy economic toll on Europe, both because of the likelihood of trade-rattling tariffs and the fiscal cost of ramping up defence spending, according to Goldman Sachs.
The investment bank’s economists have cut their 2025 growth forecast for the Eurozone from an already-pessimistic 1.1 per cent to 0.8 per cent. The UK economy will now grow only 1.4 per cent, according to Goldman Sachs, down from a previous forecast of 1.6 per cent. Predictions for 2026 were also trimmed.
Interestingly, Goldman’s forecast is based only on the prospect of more limited and targeted tariffs (primarily on European auto exports) rather than the 10 per cent blanket tariffs that Trump has proposed. If those materialised the growth hit would be much greater — a full percentage point for the Eurozone.
Increased spending on defence is likely to have a minimal impact on growth though, as wider deficits will increase bond yields increase the growth headwinds from all the “trade policy uncertainty”, the economists argued.
Here are Goldman’s main points:
— We expect President Trump’s policy agenda to affect the European economic outlook via several channels. First, and most importantly, renewed trade tensions are likely to weigh materially on growth. While the proposed 10% across-the-board tariff is a clear risk, our baseline expectation is that Trump imposes a more limited set of tariffs on European economies, targeting primarily auto exports. That said, our work has shown that the actual magnitude of tariff increases might matter less for growth than the trade policy uncertainty created.
— Second, Trump’s re-election will likely entail renewed defence spending and security pressures for Europe. Any resulting growth boost, however, is likely be limited by modest military spending multipliers in Europe, upward pressure on long-term yields from higher deficits and negative confidence effects from elevated geo-political risk. Third, we expect small net spillovers from shifts in US macro policy and financial conditions.
— Taken together, our analysis points to a 0.5% hit to real GDP in the Euro area, ranging from 0.6% in Germany to 0.3% in Italy, with a moderate 0.4% hit to the UK. We expect the bulk of the growth hit to materialise between 2025Q1 and 2025Q4.
— We therefore downgrade our growth forecasts across the region. We now forecast Euro area growth of 0.8% in 2025 (down from 1.1% and below the 1.2% consensus) and 1.0% in 2026 (down from 1.1% vs 1.4% consensus). We lower our UK growth forecast from 1.6% to 1.4% in 2025 (still slightly above the current 1.3% consensus) but are now below consensus at 1.4% in 2026. We make similar changes to our forecasts in Sweden, Norway and Switzerland.
— Our analysis suggests that the European inflation effects from Trump’s policy agenda are likely to be small, because we assume the European economies retaliate against limited US tariffs in the baseline and weaker demand limits any resulting inflationary pressures. Specifically, we estimate a 6bp effect on Euro area inflation and lift our inflation forecasts only slightly across countries.
— We expect Trump’s policy agenda to reinforce the case for lower policy rates across Europe, consistent with the prediction from simple Taylor rules. We lower our forecast for the terminal ECB deposit rate from 2% to 1.75% by adding a further 25bp rate cut in July 2025. We likewise include an additional 25bp cut for the Riksbank and the SNB. We do not make any changes to our forecast for the BoE, which we forecast will cut to 3% in November 2025, or to our Norges Bank projection, which still sees cuts to 2.75% in May 2026.
Thank God Europe spent much of the past decade working on its “strategic autonomy”, eh?
