By Indradip Ghosh

BENGALURU (Reuters) – The euro zone economy will be affected by tariffs from the incoming U.S. Trump administration early next year, according to a majority of economists polled by Reuters, which will likely lead to interest rate cuts from the European Central Bank (ECB).

President-elect Donald Trump's proposed across-the-board tariffs are expected to significantly impact the euro zone economy over the next two to three years.

"Many questions are unresolved, but for now the signs are for weaker growth, more likely disinflation and lower ECB policy rates," said Greg Fuzesi, euro area economist at J.P. Morgan.

He added, "The threatened tariffs would be much bigger this time round and could come at any time."

Nearly 85% of economists surveyed between Nov. 8-14 expected Trump's tariffs of a 10% universal levy on imports from all foreign countries and 60% on Chinese imports to be implemented early next year. About the same proportion believed these tariffs would significantly impact the euro zone economy in the coming years.

Since Trump's election victory, market expectations have shifted towards fewer U.S. Federal Reserve rate cuts and more ECB reductions. Some ECB officials voiced concerns, including Bundesbank President Joachim Nagel, who warned the tariffs could cost Germany 1% in economic output and might lead to negative growth.

Markets now project around 150 basis points of ECB rate cuts by the end of 2025, compared to around 75 basis points of Fed reductions. This poses further challenges for the euro, which has declined nearly 4% against the dollar since the election.

Most economists in the Reuters poll anticipated at least 125 basis points of reductions from the ECB by the end of 2025, which aligns closely with market pricing.

Over 90% of economists, 69 of 75, predict the ECB will lower its deposit rate by 25 basis points for the third consecutive meeting in December, and nearly 70% (51 economists) forecast two more cuts next quarter, bringing the rate to 2.50%.

While many downgraded their 2025 forecasts, the medians still expect the economy to grow at 1.2% in 2025 and 1.4% in 2026, unchanged from last month, indicating further downside risks.

Henry Cook, senior economist at MUFG, noted, "A global rise in tariffs between the U.S., EU and China and increasing uncertainty around global protectionism poses significant risks," estimating a 0.4 percentage point decline in euro zone growth next year.

Inflation, which met the ECB's 2.0% target last month, is projected to average 2.2% this quarter but return to the target next quarter, remaining around that level through 2027. Nearly 70% of economists (43 of 63) expected the deposit rate to drop to 2.00% or lower by the end of next year, a higher proportion than the 60% who anticipated this in October.

Among 44 contributors in the two polls, 43% of economists (19) downgraded their end-2025 rate forecasts. The ECB does not have an estimate for the neutral rate that neither restrains nor stimulates the economy, but a staff-published paper from earlier this year indicated a real rate around zero (approximately 2% nominal when adjusted for inflation).

Mark Wall, chief Europe economist at Deutsche Bank, noted, "We now see the rate falling moderately below neutral by the end of 2025 due to the prospect of U.S. tariffs from the new Trump administration and poorer macro performance, along with the risk of below-target inflation."