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Investing.com -- The eurozone is facing the growing risk of recession as trade tensions escalate and growth prospects weaken, analysts at Citi Research warn.
In its latest forecast, the bank has lowered euro area GDP growth projections for 2025 to 0.8%, down from 1%, and for 2026 to 0.6%, from a previous estimate of 1.3%.
Inflation is also expected to ease, with the Harmonised Index of Consumer Prices (HICP) now forecast to average 1.6% in 2026, 0.2 percentage points lower than Citi's March outlook.
The downgrade follows the announcement of new US tariffs on European goods, which Citi expects to remain in place.
Around €310 billion of exports—excluding energy, pharmaceuticals, and cars—are now subject to a 20% tariff.
In addition, €42 billion worth of cars and parts are facing a 25% tariff. Citi estimates eurozone exports to the US could fall by up to 50%, leading to a 4.5 percentage point drop in total exports and shaving 0.6 percentage points off GDP.
But the impact is likely to extend further. Citi warns that the global nature of the tariffs will also hit other trading partners, reducing their demand for European goods and services.
China, for instance, has already revised its 2025 growth forecast down by 0.5 percentage points to 4.2%.
The broader fallout is expected to come not just from weaker trade but from rising uncertainty. Firms across Europe are likely to delay investment as they reassess their operating environment.
This, combined with tighter financial conditions—such as rising borrowing costs, wider credit spreads, and a stronger euro—adds to the pressure on growth.
Citi now estimates the total GDP impact at around one percentage point, with the slowdown expected to become visible from the second quarter of 2025 and to persist for five to six quarters.
During this period, quarterly growth is forecast to hover around zero for three consecutive quarters.
In light of these developments, Citi expects monetary policy will need to ease further. Interest rates are projected to fall into expansionary territory, eventually reaching a trough of 1.5%.
With downside risks increasing, Citi warns that any escalation in market or policy volatility could trigger a broader crisis of confidence.
The latest shock marks the third major disruption for the euro area economy in less than five years, following the pandemic and the energy crisis.
“The economy had started to slowly normalize following the energy shock, but it now faces the prospects of falling back into a recession,” Citi said.