The tariffs proposed by U.S. President-elect Donald Trump on the European Union are anticipated to impact the eurozone's economic growth, according to RBC Global Asset Management Inc. Chief Economist Eric Lascelles. He estimates that a 10 percent blanket tariff could reduce the eurozone GDP by one percent over two years.
Since Trump's election in November, GDP growth forecasts for the eurozone have been slightly reduced from 1.2 percent to one percent for 2025 due to tariff concerns. However, "Trump’s transactional approach suggests to us there may be room for negotiations," offering potential concessions like increased defense spending or purchasing more U.S. oil and gas.
Germany is set for federal elections on February 23, which are crucial given its struggling economy post-pandemic. The current three-party coalition has failed to implement necessary fiscal stimulus due to constitutional constraints like the "debt brake." Polls suggest a likely shift towards a coalition between the Christian Democratic Union of Germany (CDU), Christian Social Union in Bavaria (CSU), and Social Democratic Party (SPD), potentially allowing changes to this rule.
RBC Capital Markets predicts a CDU/CSU-led government might loosen fiscal policies modestly, with possible reforms of the debt brake if they achieve a two-thirds majority with their allies. They foresee increased defense and infrastructure spending and possible deregulation under such governance.
In China, recent announcements hint at a shift towards "more proactive fiscal policy" and a "moderately loose" monetary stance after years of prudence. These changes could benefit Europe, as China is an essential export market for European goods.
Investors face several challenges in Europe including low competitiveness and geopolitical risks, prompting RBC Wealth Management to recommend maintaining a modest Underweight in European equities. Nonetheless, positive developments from these events could present investment opportunities.
Frédérique Carrier, Managing Director and Head of Investment Strategy at RBC Europe Limited, notes that despite these headwinds, certain sectors like semiconductor manufacturing equipment and industrial gases remain promising investment areas due to their alignment with global structural trends.