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Investing.com -- UBS has cut its Eurozone GDP growth forecasts for 2025 and 2026, pointing to the economic hit from U.S. tariffs and delayed spending effects.
The bank now sees Eurozone growth at 0.5% in 2025, down from 0.9%, and at 0.8% in 2026, down from 1.1%. At the same time, UBS hiked its 2027 projection to 1.5% from 1.2%, anticipating a recovery driven by higher public spending.
“The damage from U.S. tariffs is likely to hit the European economy hard and fast over the coming 3-4 quarters,” economists led by Reinhard Cluse said in a note, while the fiscal boost from increased defence and infrastructure investment is expected to support growth more meaningfully only from 2026.
The combination results in what UBS calls a “J-curve pattern,” with a near-term slowdown followed by a gradual recovery in 2026 and 2027.
Against this backdrop, UBS expects the European Central Bank (ECB) to cut rates by 25 basis points each in April and June, bringing the deposit rate to 2%. Rate hikes could return in late 2026, with the ECB potentially lifting rates back to 2.5% as inflationary pressures from fiscal expansion build.
“A stronger euro (EUR) and higher bond yields might also help to establish sufficient monetary tightening required to stabilise inflation around the 2% target in 2027,” economists said.
Among the larger Eurozone economies, Germany is seen as the most exposed to the tariff shock. UBS now expects a technical recession in the second half of 2025, cutting the GDP forecast to -0.3% from 0.3%. Growth should rebound to 1.0% in 2026 and 1.9% in 2027, aided by Germany’s sizeable fiscal stimulus.
France is expected to be less affected, with GDP seen at 0.6% in 2025 and 1.0% in 2026.
Italy and Spain also face slower growth in 2026 due to the trade shock, though Spain's 2025 forecast remains unchanged at 2.3%.
Outside the Eurozone, UBS slashed its 2025 GDP outlook for the UK to 0.7%, Switzerland to 0.7%, and Sweden to 1.9%, citing spillover effects from the Eurozone and the global trade environment. All three economies are expected to see modest rebounds by 2027.