Trump’s sweeping tariffs to push Eurozone into recession by mid-2025: BCA

Investing.com -- The Eurozone is heading into a mild recession by mid-2025, driven by sweeping U.S. tariffs that deepen an already fragile economic backdrop. 

According to analysts at BCA Research, the latest trade measures introduced by President Donald Trump will worsen corporate profits, suppress capital investment, and further erode sentiment across the region.

The new tariffs raise the U.S.’s overall tariff rate to 22%, its highest level since 1910. For the Eurozone—where industrial output, retail sentiment, and capex plans had already been weakening—the shock will be especially severe. 

BCA says the tariffs will directly impact European exporters, particularly the auto sector, where tariffs now reach 25%.

BCA cites modeling from the Peterson Institute for International Economics showing that tariffs of this scale could trim growth by 0.25 percentage points in Germany, 0.12 in France, and 0.15 in Italy. 

Although the actual tariff rate is slightly below those modeled, the broader environment of higher global trade barriers and uncertainty suggests the economic damage will be comparable.

Adding to the pressure is China’s export reallocation. In response to rising U.S. tariffs—now as high as 64%—Chinese producers are likely to redirect shipments to Europe. 

This mirrors the 2018–2019 U.S.-China trade war, when similar redirection triggered deflationary effects in the Eurozone. BCA expects a repeat scenario, compounding Europe’s economic vulnerabilities.

Investor sentiment is also under pressure. Profit forecasts are being revised lower, margins are shrinking, and capital expenditure plans are being cut across the board. 

BCA warns that this will trigger a broader investment pullback and drag GDP growth into negative territory in the coming quarters.

In response, Europe is activating a multi-pronged policy plan. First, fiscal support is being ramped up. 

Germany is fast-tracking stimulus worth 1% of GDP per year over the next two years, and European Commission President Ursula von der Leyen has called for common bond issuance to fund additional spending.

Second, the European Central Bank is expected to lower its deposit rate below 2% and could resume quantitative easing. Inflation expectations remain anchored, and the output gap is widening, giving the ECB room to act without risking price instability. 

Policymakers are treating this as an exogenous shock—similar in nature to the COVID-19 crisis—and are expected to facilitate, not hinder, the fiscal response.

Third, the EU is seeking to diversify its trade ties away from the U.S. Talks are expected with Canada, Latin America, and the UK, while ties with Switzerland and Norway are set to deepen. 

These relationships won’t immediately offset volatility in U.S. trade, but they are seen as long-term buffers.

A fourth response is likely to involve retaliation. While the EU is currently pursuing dialogue with Washington, BCA expects measured counter-tariffs will be introduced to demonstrate resolve and discourage further trade escalation.

The fifth and most significant axis is structural: completing the Single Market. The IMF estimates that internal non-tariff barriers within the EU are equivalent to a 44% tariff on goods and 110% on services. 

By tackling these inefficiencies, the EU aims to improve scale, boost investment, and lift productivity. The push toward a capital markets union is also gaining urgency, as it would expand non-bank financing critical for R&D and innovation.

Although these initiatives won’t arrive fast enough to prevent a downturn, BCA says they will help soften the blow. Private sector liquidity is at its highest level since the euro’s introduction, and banks remain in strong shape—conditions that offer a buffer during the downturn.

On the investment front, BCA advises a cautious approach in the near term. Defensive sectors and bonds are preferred over equities and cyclicals. 

As growth slows and profits fall, earnings downgrades are expected to lead to further equity underperformance, similar to the 14% drop seen during the 2018 trade war.

However, BCA remains optimistic about the longer term. European stocks, they argue, are pricing in excessive risk. 

As fiscal support takes hold and integration deepens, a recovery in productivity and corporate earnings should follow. Banks and telecoms, viewed as key beneficiaries of integration, are positioned to lead the next leg higher once volatility subsides.

In fixed income, European bonds remain attractive, particularly those issued by Spain and France. 

Spanish bonds offer solid fundamentals and low risk, while French OATs provide higher yields and liquidity—making them a potential high-beta trade on expected ECB policy easing.

The euro, too, is seen as undervalued—trading at an 18% discount to fair value. While recent strength may have run ahead of fundamentals, BCA says it stands to benefit if global capital begins shifting away from U.S. assets.