The growth outlook for the euro area suggests potential weakening despite a strong start in Q1. The growth forecast for 2025 remains at 0.8%, with heightened recession risks due to trade uncertainties, affecting even the 2026 and 2027 projections.

The euro area’s near-term growth could slow due to US tariffs impacting demand for exports. The tariff situation between the US and EU may lead to varying rates, affecting economic growth further. Despite potential hurdles, expanded trade elsewhere is expected to mitigate tariff impacts in the longer term.

Revised Growth Forecasts

A revised growth forecast for 2026 has been set at 1.0%, down from the previous 1.2%. This adjustment is due to the lingering effects of trade issues. Conversely, growth for 2027 is projected to increase to 1.6% from an earlier 1.1%, driven by fiscal boosts and defence spending, particularly in Germany.

These forecasts account for ongoing uncertainties and suggest that while the short-term may see challenges, there is potential for recovery in the following years. Strategic trade adjustments and increased fiscal expenditures are anticipated to foster a more positive growth trajectory by 2027.

Given the revised projections, it’s now becoming clear that the near-term economic momentum within the euro area is facing pressure—not from internal weaknesses, but rather from external disruptions rooted in global trading tensions. A sturdy showing early in the year was not enough to offset increasing concerns that a deceleration is already underway. Forecasts staying flat at 0.8% for 2025 highlight diminished confidence, particularly with recession indicators blinking due to altering trade dynamics.

2026 and 2027 Economic Shift

The updated forecast for 2026—marked down to 1.0%—directly reflects the knock-on effects from shifting US tariff policy. We’re not only seeing lowered expectations for export demand; there’s also an indirect cooling effect on business investment. Currency positions will need to adjust accordingly. For holders of longer-dated positions, reduced optimism in output growth could affect euro-based yield curves, possibly creating subtle dislocations in risk pricing.

Looking a bit further ahead, however, there’s a notable pivot. The reassessment for 2027, now pointing to 1.6% growth, suggests that fiscal actions—especially in defence allocations in Germany—might start offsetting the prior drag caused by trade disruptions. It is, essentially, a delayed response mechanism—where public budgets are filling gaps left by softer private sector trade activity. This change should not be interpreted lightly. There’s a time gap between appropriation and spending impacts, which introduces a pacing element that could influence rates volatility.

Importantly, this longer-term upside is conditional—not just on domestic measures but on the assumption that other global tensions don’t resurface with fresh intensity. If further protectionism creeps in or if external markets fail to expand as expected, then upside bets could unwind rapidly. We’ve modelled similar scenarios before; the memory of mid-2010s underperformance lingers for a reason.

Short-term exposure should continue to reflect a cautious tilt. Any strategies banking on rate shifts or inflation convergence across the bloc should consider layering hedges, particularly when divergences between member states—both fiscally and politically—remain unresolved. Moving in and out of convexity carries risks not yet fully priced by the market. We notice that lagging indicators, including PMI composites and export orders, haven’t steeply turned yet. Watching their direction beyond the summer will be vital.

On duration, there may be a case for slight rebalancing towards the long-end as 2027 expectations begin to firm. However, that window is narrow and would require conviction that fiscal delivery, especially in Germany, materialises on schedule. For now, spreads remain mostly orderly, with implied risk premium fairly stable. This helps, but doesn’t remove potential volatility under compression stress.

The key message here is that correlation assumptions among contributing sectors may not hold in the short run. We are not in a cyclical upswing across the region. Cross-asset positioning should reflect a broader range of outcomes—possibly tail risks stemming from slower-than-priced fiscal implementation. Traders who lack exposure to these forward scenarios—positively or negatively—may find themselves caught off-balance in monthly positioning adjusts.

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