Eurozone Growth Outperforms Trade War Headwinds—But Risks Loom

The Eurozone economy delivered a modest surprise in early 2025, with first-quarter GDP growth of 0.3% quarter-on-quarter, outpacing consensus expectations of stagnation. Yet this resilience faces mounting headwinds from a global trade war escalating between the U.S. and China—and now the EU itself. While the Eurozone’s services sector and industry segments provided a lifeline in Q1, the specter of tariffs, supply chain disruptions, and policy uncertainty threatens to derail recovery. For investors, this duality demands a nuanced approach: capitalizing on near-term resilience while hedging against longer-term risks.

The Q1 Growth Surprise: Services and Industry Prop Up the Eurozone

The Eurozone’s preliminary Q1 GDP data, released in April 2025, showed 0.6% year-on-year growth, driven by unexpected strength in agriculture and industry. Services—the backbone of the Eurozone economy—contributed nothing to growth, while net exports dragged down results due to weaker foreign demand. The ECB’s “carry-over” projection for 2025 GDP now stands at +0.4%, a slight upgrade from earlier estimates but still tepid by historical standards. This suggests that, for now, the Eurozone’s domestic dynamism can offset some external pressures.

Trade Wars Escalate: From Steel to Services

The real threat lies in the widening scope of global trade conflicts. The U.S. has re-imposed 25% tariffs on EU steel and aluminum, extended 10% blanket tariffs on broader EU imports, and targeted automotive sectors with a 25% tariff on cars. In retaliation, the EU has threatened countermeasures—such as tariffs on U.S. bourbon, motorcycles, and tech products—though a 90-day pause on escalation is in place. Meanwhile, the U.S.-China tariff war rages on, with 10% U.S. tariffs on all Chinese goods and China’s retaliatory bans on critical metals like tungsten and tellurium.

But the stakes have risen beyond goods. The U.S. now disputes EU regulations like the Digital Markets Act (DMA), which governs tech giants, and the Digital Services Act (DSA), claiming they disadvantage American firms. This marks a new frontier: a trade war in services and technology, where the U.S. holds a $200 billion annual surplus over the EU. The ECB warns that such disputes could reduce Eurozone growth by 0.2% annually through 2026 due to dampened investment and competitiveness.

Data Spotlight: Trade Dynamics Under Siege

The Eurozone’s export-dependent industries are already feeling the pinch. The ECB’s March 2025 projections show Eurozone export growth downgraded by 0.8 percentage points in 2025 due to trade policy uncertainty. The automotive sector, which accounts for 12% of Eurozone manufacturing output, faces rising input costs from steel tariffs and retaliatory measures. Meanwhile, services—particularly digital—now face U.S. pressure to alter regulatory frameworks, complicating cross-border data flows and cloud services.

Inflation and Policy Dilemmas

While core inflation is projected to ease to 2.0% by 2026, energy prices remain volatile. The ECB’s reliance on a weakened euro (down 2.1% against the dollar in 2025) to boost exports is tempered by import-cost inflation. A prolonged trade war could force the ECB to reconsider its dovish stance, risking tighter monetary conditions and further growth slowdowns.

Investment Implications: Navigating the Crosscurrents

1. Near-Term Opportunities:
2. Services Sector Resilience: Companies in healthcare, tourism, and digital services—less exposed to tariffs—may outperform. For example, Telefónica (TEF) and Vodafone (VOD), which benefit from rising demand for connectivity, could remain stable.

3. Trade-Resistant Sectors: Firms with diversified supply chains or strong domestic demand, such as Renault (RENA.PA) in automotive or L’Oréal (OREP.PA) in consumer goods, might weather trade headwinds better.

4. Long-Term Risks:

5. Export-Heavy Industries: Companies reliant on EU-U.S. trade, like Thyssenkrupp (TKA.GR) in steel or Siemens (SIE.GR) in industrial machinery, face margin pressures from tariffs.
6. Tech and Services: U.S.-EU regulatory clashes could disrupt firms like SAP (SAP) or Deutsche Telekom (DTE.GR). Investors should favor companies with cross-border flexibility or lobbying power.

Conclusion: Growth Remains Fragile, Caution Advised

The Eurozone’s Q1 surprise growth masks underlying vulnerabilities. While domestic demand and industry provide short-term ballast, the escalating trade war—now encompassing services and tech—threatens to erode competitiveness and investment. The ECB’s downward growth revision to 0.9% in 2025 underscores the fragility of recovery. Investors should prioritize defensive sectors and companies with diversified revenue streams, while remaining cautious on export-reliant industries. As the U.S. and EU navigate a new era of trade friction, the Eurozone’s resilience hinges on whether multilateral solutions can outpace unilateral tariffs—a battle that remains very much unresolved.