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Europe’s Growth, Inflation and Monetary Policy Rates Weaken Despite Tariff Pause, as GS Updates Its Forecasts

President Trump’s decision to pause the implementation of country-specific reciprocal tariffs provided relief for European economies, but the outlook has weakened along several other dimensions since early April. GS Research’s economists have updated their forecasts for European growth, inflation, and monetary policy, underscoring a shift toward a more cautious and nuanced outlook for the region. The combination of immediate tariff relief and evolving macro conditions has created a complex picture for policymakers, businesses, and households across Europe.

Context: The tariff pause and its immediate economic impact

The pause in country-specific reciprocal tariffs delivered a welcome reprieve to European economies that were navigating already fragile growth trajectories. By deferring planned tariff actions, authorities signaled a temporary de‑escalation in a trade dispute that could have disrupted supply chains, raised input costs, and cooled investment sentiment. For many exporters and manufacturers, the delay reduced near-term uncertainty and helped stabilize order books, if only hesitantly.

However, the relief was not a panacea. While some indicators suggested stabilization in trade expectations and business confidence in the near term, other dimensions of the European economic engine continued to face headwinds. Domestic demand, capital formation, and consumer spending trajectories remained under pressure in several economies, reflecting a combination of lingering uncertainty, tighter financial conditions, and evolving external risks. In other words, the tariff pause bought time but did not erase the fundamental challenges facing the region.

As the period since early April has unfolded, analysts have observed a broad-based softening in the outlook beyond the tariff-related relief. Economic momentum appears to have cooled on several fronts, with indicators signaling slower growth, easing inflation pressures, and changing monetary policy expectations. The net effect is a more nuanced and less sanguine forecast landscape for Europe, even as some aspects of stabilization persist.

GS Research’s revised forecasts: Growth, inflation, and monetary policy

GS Research’s European Economics team has undertaken a comprehensive revision of their baseline forecasts. The updated projections reflect a more cautious view of growth across major European economies, with anticipated slower expansion relative to earlier expectations. The revisions acknowledge that while the tariff pause provides a relief scenario for trade exposure, other channels of the economy continue to exert downward pressure on growth.

In the inflation dimension, the forecast adjustments point to a moderating but persistent inflation trajectory rather than a rapid re-acceleration. The path for consumer prices is now viewed as less robust, with core and headline inflation expectations evolving in tandem with evolving wage dynamics, energy costs, and import prices. The revised view suggests that inflation may tolerate a longer period of gradual cooling, even as some price pressures remain sticky in certain sectors and countries.

Monetary policy implications form a central pillar of the updated outlook. The analysts weigh the balance between inflation trajectories, output gaps, and financial conditions in determining the appropriate calibration of policy rates and asset purchase programs. The revised forecast framework implies a cautious stance from central banks, with probabilities shifted toward gradual adjustments rather than abrupt moves. Market expectations around future rate paths appear to be migrating in line with the revised baseline, incorporating the new uncertainty surrounding trade dynamics and domestic demand.

Across the euro area and key member economies, the updated forecasts reflect a convergence toward a slower growth tempo, with inflation cooling more gradually than some had anticipated and monetary policy likely to reflect a painstakingly calibrated response. These shifts have implications for currency markets, government borrowing costs, and business investment planning, reinforcing the need for firms and households to adapt to a slower but steady macro backdrop.

Driving forces behind the weaker outlook

Global demand and trade dynamics

A critical component of the revised outlook centers on the evolving pattern of global demand. Even with tariff relief, Europe remains exposed to external demand fluctuations in major trading partners, which influence export performance and manufacturing activity. Global growth prospects, trade policy developments, and geopolitical tensions can all feed through to European economies via demand channels, commodity prices, and financial market sentiment. The reframing suggests that external demand may contribute to slower export growth and dampened investment optimism in the near term.

Trade dynamics outside the tariff context also matter. Supply chain realignments, shifts in sourcing patterns, and changes in global production costs can influence European competitiveness over multiple quarters. Companies may respond by adjusting inventories, diversifying suppliers, or accelerating automation—moves that can alter growth trajectories even as headline trade tensions ease. The net effect is a nuanced trade environment where relief from tariffs coexists with broader external headwinds.

Domestic growth drivers and demand composition

Within Europe, domestic demand has shown signs of softening in several economies. Consumer spending, investment appetite, and housing activity can be uneven across countries, reflecting differences in labor markets, fiscal support, and credit conditions. Even with tariff relief, households may face cautious spending behavior if uncertainty remains elevated or financial conditions tighten further. Business investment might also recalibrate as firms reassess capital projects in light of the evolving policy and demand landscape.

Labor market developments, wage dynamics, and consumer confidence play pivotal roles in shaping domestic demand. Moderating wage growth or persistent employment fragility could restrain consumption even as monetary policy remains accommodative in some areas. Conversely, in economies where labor markets strengthen and confidence improves, consumption and investment could stabilize more quickly, creating a differential path across the region.

Inflation pathways and price pressures

Inflation dynamics are central to the revised outlook. While the tariff pause can ease some import cost pressures, the broader inflation story in Europe is influenced by wage trends, energy prices, and domestic pricing behavior. If energy costs remain volatile or if supply chain disruptions reemerge, headline inflation could exhibit renewed sensitivity to shocks. Core inflation, stripped of volatile components, may follow a slower downward trajectory, potentially prolonging the period before inflation returns decisively to target levels in some economies.

The interaction between inflation and wage growth will matter for real incomes and consumer purchasing power. If wage gains fail to keep pace with any persistence in price growth, real incomes could come under pressure, weighing on household consumption. Conversely, if wages accelerate in line with or ahead of price growth, consumer sentiment and spending could stabilize more quickly, providing a counterbalance to other headwinds.

Monetary policy signals and financial conditions

The updated forecasts reflect evolving expectations for monetary policy. Central banks in Europe have to balance the need to support growth with the goal of anchoring inflation expectations. As growth slack and disinflationary pressures emerge, policy rates may remain at accommodative levels longer than previously assumed, with gradual normalization occurring as data evolves. Financial conditions—such as credit availability, borrowing costs, and risk premia—will influence investment and consumption, reinforcing the sensitivity of the outlook to policy communication and market dynamics.

Market participants will be watching for signals about asset purchases, inflation targets, and the pace of policy normalization. If inflation cools faster than anticipated or if growth weakens substantially, central banks may adopt more dovish guidance or extend supportive measures. Conversely, if inflation proves stubborn in certain sectors or countries, policymakers could maintain a firmer stance, all else equal, prolonging the path toward monetary accommodation.

Regional variations and sectoral nuances across Europe

Core versus periphery and northern versus southern economies

The revised outlook recognizes that European conditions are not uniform. Core economies may experience a more resilient path due to stronger manufacturing bases, robust financial markets, and more diversified export profiles. Peripheral economies could face a more pronounced adjustment period, particularly if external demand remains soft or if financing conditions tighten. The regional heterogeneity implies that policy and business decisions will need to be tailored to country-specific conditions rather than relying on a uniform euro-area-wide script.

Sectoral dynamics also vary. Manufacturing and export-intensive sectors might benefit from the tariff pause through improved order books, while services and domestic-oriented industries could see more modest gains if consumer demand remains cautious. Energy-intensive industries and those tied to global commodity cycles may experience distinct price pressures that feed into margins and investment decisions. The snapshot of sectoral variation reinforces the importance of granular analysis for forecasting and strategic planning.

Cross-border implications for investment and capital flows

Investment decisions in Europe are influenced by the combined effect of tariff relief, macro momentum, and policy signals. Firms may recalibrate capital expenditure plans, weighing the costs and benefits of expansion against the backdrop of slower growth and evolving inflation. Cross-border investment flows can reflect relative country risk, exchange rate considerations, and the anticipated path of monetary policy. The recalibrated forecast suggests that investment could rebound gradually rather than surge, aligning with the more cautious growth environment.

Capital markets will also respond to the revised outlook. Equity, bond, and currency markets react to perceived shifts in growth, inflation, and policy trajectories. While tariff relief reduces some downside risk, ongoing uncertainty in external demand and domestic demand components can sustain volatility. Market participants will monitor central bank communications, data releases, and trade policy developments to gauge the trajectory of financial conditions.

Implications for policy and market expectations

European Central Bank and policy calibration

The updated forecast framework highlights the need for careful policy calibration by the European Central Bank (ECB). With growth decelerating and inflation pressures evolving, the ECB’s policy stance will likely emphasize a balanced approach: maintaining accommodation where growth remains weak, while remaining vigilant for signs of inflation persistence or momentum that could require adjustments. Clear communication about the healthcare of inflation expectations and the durability of growth will be essential to anchoring markets and guiding business expectations.

Fiscal policy posture and coordination

Fiscal policy will continue to play a complementary role in supporting demand, particularly if monetary policy remains gradual in its response. The balance between stabilization measures, structural reforms, and long-term sustainability will shape the trajectory of growth and resilience across European economies. Cross-country coordination on investment in infrastructure, green transition, and digital resilience could strengthen the region’s medium-term potential, even as near-term macro indicators show softness.

Implications for households and business planning

For households, the revised outlook suggests a conservative stance on spending and saving, with caution shaped by anticipated inflation trajectories and wage growth. For businesses, the message is pragmatic: plan for a gradual improvement rather than a rapid rebound, maintain flexibility in supply chains, and monitor policy shifts closely. Strategic decisions—ranging from inventory management to pricing strategies and capital allocation—will need to reflect the nuanced mix of growth, inflation, and policy signals embedded in GS Research’s forecasts.

Sectoral and market considerations: practical implications

Manufacturing, trade, and supply chains

Manufacturing sectors tied to international trade may experience a modest uptick in sentiment thanks to tariff relief, but producers must contend with a broader climate of slower demand and cost pressures. Supply chains may continue to adjust to post-pandemic realities, geopolitical tensions, and evolving trade rules. Firms that optimize supplier diversification, risk management, and production flexibility could emerge better positioned to weather ongoing volatility.

Services and consumer-facing industries

Service sectors, including retail, hospitality, and professional services, may benefit from more stable consumer confidence if inflation trends ease and real incomes stabilize. However, the pace of improvement could lag behind improvements in manufacturing if consumer sentiment remains cautious or if disposable incomes face pressure from slower wage growth. Businesses in these areas should emphasize value propositions, efficiency improvements, and customer experience to sustain growth in a cooling environment.

Energy, commodities, and inflation exposure

Energy and commodity-intensive industries will be sensitive to price movements and policy signals. With inflation trajectories shifting and energy markets remaining volatile, these sectors require vigilant cost management and hedging where appropriate. The interaction between commodity pricing, exchange rate dynamics, and monetary policy will continue to shape margins and investment decisions across a wide range of European industries.

Methodology: How GS Research arrives at updated forecasts

Data sources and time horizons

GS Research’s forecast revisions are grounded in a comprehensive review of quarterly national accounts, high-frequency indicators, inflation data, labor market metrics, and financial conditions. The team employs scenario analysis to capture the range of possible outcomes given trade developments, policy shifts, and external shocks. The baseline projection reflects a central path, while upside and downside scenarios illustrate how alternative developments could alter the trajectory.

Assumptions and risk considerations

Key assumptions include a measured pace of monetary policy normalization, a moderate improvement in consumer confidence, and a gradual stabilization of external demand. Risks to the forecast include renewed trade tensions, sharper energy price shocks, and unexpected policy changes in major trading partners. The analysis emphasizes the importance of monitoring data momentum and policy communications to adjust expectations as new information arrives.

Communication and transparency

GS Research prioritizes clear, continuous communication about forecast revisions, the rationale behind changes, and the sensitivity of outcomes to key variables. The goal is to provide policymakers, investors, and business leaders with a transparent view of how the macro landscape is evolving and what that means for strategic decisions in the European context.

Implications for investors and policymakers

Investors should consider the slower growth and more cautious inflation path when pricing assets and assessing risk. Government and corporate borrowers might face elevated uncertainty regarding funding costs and policy direction, reinforcing the appeal of prudent balance-sheet management and duration management. Policymakers, in turn, may seek to maintain credibility and flexibility, ensuring that guidance remains responsive to evolving data while supporting sustainable, balanced growth.

A key takeaway is that tariff relief does not automatically translate into rapid macro improvement. The broader environment—external demand, domestic demand, inflation dynamics, and policy signals—plays a decisive role in shaping the actual pace of economic recovery and resilience in Europe. Stakeholders should prepare for a cautious but steady path forward, with emphasis on structural reforms, investment in productivity-enhancing areas, and prudent fiscal and monetary policy coordination.

Conclusion

In summary, President Trump’s pause on country-specific reciprocal tariffs provided temporary relief for European economies, but the outlook has softened across multiple dimensions since early April. GS Research’s economists have revised their forecasts for European growth, inflation, and monetary policy to reflect a more cautious stance, acknowledging that tariff relief coexists with broader macro challenges. The updated view highlights regional heterogeneity, sector-specific dynamics, and the critical role of policy alignment in navigating a slower but steady path forward for Europe. Policymakers, businesses, and investors will need to monitor evolving data, policy signals, and external developments to adapt strategies and expectations in this nuanced landscape.