EU inflation forecast to tumble as Brussels warns of looming trade war

The European Commission has hailed a ‘gradual’ rebound in economic activity, but warns the EU is ‘especially vulnerable’ amid rising geopolitical tensions.

The EU could see inflation rates fall by over 50% next year, amid a modest economic rebound and record low unemployment, the European Commission said in a forecast published on Friday.

The report — whose numbers were finalised in October, before US elections swept Donald Trump back into power — warns the bloc’s open economy is “especially vulnerable” to rising protectionism.

The news comes after a period of rising energy and food prices, in part caused by Russia’s 2022 full-scale invasion of Ukraine.

The high cost of living was at the top of voters’ minds as they went to the polls in June, in EU elections that saw a significant rise in support for far-right parties.

But inflation is due to fall dramatically next year, with EU prices rising by just 2.4% in 2025, compared to 9.2% in 2022 — bringing rates much closer to a European Central Bank target of 2% inflation for the euro area. Unemployment in the EU “reached a new historical low of 5.9%” in October, the report added.

Stung by recent shocks, EU households are still prudently saving rather than spending, and the potential for further flare-ups in global trade is still worrying Brussels officials.

“A further increase in protectionist measures by trading partners could upend global trade, weighing on the EU’s highly open economy,” the report warned.

That threat was further underlined by EU Economics Commissioner Paolo Gentiloni, who told reporters that “a possible protectionist turn in US policy would be extremely harmful for both economies,” but that the bloc was “ready” to address any issues.

“Both regions maintain a shared interest in upholding high standards,” he said, adding that economic integration “is a stabilising economic and political force.”

Trump won the 5 November elections on a promise to impose tariffs of 10% on imports from places such as the EU, but the Commission’s forecasts only account for policies announced and specified “in adequate detail” by a cut-off date in late October.

The bloc’s biggest economic laggard is its largest member, Germany, whose growth will be lowest in the EU in 2025 and second-lowest in 2026, at 0.7% and 1.3% respectively, the forecast predicted — a result laid at the door of weak domestic and foreign demand for manufactured goods and labour shortages plaguing the construction sector.

The sluggish performance of the German economy is accompanied by political turmoil, after the dramatic resignation of liberal coalition partners the FDP led socialist Chancellor Olaf Scholz to call early elections for February 2025.