EU slashes eurozone growth forecast on US trade war tensions

The EU today slashed its growth forecast for the eurozone in 2018, warning that the rising trade tensions with the United States were hitting the economy.

The European Commission, the EU's executive arm, said the 19-country single currency bloc would expand by 2.1 per cent in 2018, lower than the 2.3 per cent forecast just weeks ago in early May.

"Our forecast is for a continued expansion in 2018 and 2019, although a further escalation of protectionist measures is a clear downside risk," said EU Economic Affairs Commissioner Pierre Moscovici in a statement.

"Trade wars produce no winners, only casualties," he added.

The commission added that the economy in the eurozone would expand by 2.0 per cent in 2019, the same forecast as in May.

 

The worry about the European economy stems from the ongoing trade dispute with the administration of US President Donald Trump, which has now threatened to impose tariffs on European auto imports, with German auto giants the intended target.

If confirmed, the policy would be one of the most aggressive transatlantic blows since the Great Depression and risks bitterly splitting the allies amid divisions over the Iran nuclear deal and the Paris climate accord.

The threat by Trump comes after the mercurial leader already slapped 25 per cent tariffs on steel and 10 per cent on aluminium on imports from Europe and other key allies.

"First and foremost, if trade tensions with the US were to escalate further, this could dampen confidence more permanently, ... likely disrupting the current global (economic recovery)," the commission said in its forecast report.

The commission also pointed to "political and policy uncertainty in a number of EU countries" as an important downside risk to the forecast, which included the fallout of stalled Brexit talks.

This also included heavily-indebted Italy, after a far-right/populist coalition formed a government on the promise to break EU budget and spending rules. The commission said higher oil prices, which have spiked partly due to growing tensions over Iran, were also a negative factor.