Eurozone's current account surplus narrowed in February, is an interest rate cut by the European Central Bank imminent amid economic gloom?

According to the Zhitong Finance APP, data released by the European Central Bank on Wednesday showed that the eurozone's current account surplus narrowed in February, as the increase in the services surplus was insufficient to offset the impact of rising goods imports. The data indicated that the eurozone's seasonally adjusted current account shrank from EUR 40.3 billion in January to EUR 34.3 billion in February, while the unadjusted current account rose from USD 18 billion in January to USD 33.1 billion in February. Additionally, in the 12 months ending in February this year, the trade surplus accounted for 2.7% of the eurozone's GDP, up from 2.0% in the previous 12 months.

The outlook for the eurozone economy has once again been overshadowed after U.S. President Trump announced large-scale "reciprocal tariffs" on trade partners. Data released on Tuesday showed that the eurozone's ZEW Economic Sentiment Index for April plummeted to -18.5, far below the previous value of 39.8; the ZEW Current Situation Index for April also fell from -45.2 to -50.9.

Earlier, sources indicated that the impact of U.S. trade tariffs on the eurozone's economic growth could be much greater than the European Central Bank initially estimated, potentially pushing the eurozone economy into stagnation and extinguishing hopes for recovery supported by large-scale public investment plans.

According to Nomura Securities, a 10% tariff on U.S. exports to the EU could reduce the EU's GDP growth by one-third, not accounting for the impact of ongoing uncertainty from tariff policies that may lead investors and businesses to delay decisions.

The European Central Bank predicted last month that the trade war would reduce the eurozone's economic growth rate by 0.5 percentage points in the first year, and if the EU retaliates, prices would also briefly rise by a similar magnitude. However, sources indicated that the actual tariffs announced by Trump are more harmful than the model estimates, and ECB staff have been asked to provide new figures for policymakers to discuss at the meeting on April 17. Everyone agrees that the 0.5 percentage point estimate is now too low. One source indicated that the impact on the eurozone economy could exceed 1 percentage point. This would essentially wipe out all economic growth, as the eurozone's growth is expected to be around 1% this year.

Taking Germany, the largest economy in the eurozone, as an example, major institutions hold a relatively pessimistic view of its economic outlook. In 2024, the total bilateral trade in goods between the U.S. and Germany is expected to reach EUR 253 billion. Research from the IAB Institute for Employment Research predicts that one year after the implementation of tariffs, the German economy will decline by 1.2 percentage points, marking the first time Germany has experienced three consecutive years of recession since the war. The German Economic Institute (IW) used the global economic model simulation tool from Oxford Economics to estimate that the existing high tariffs alone will cause the German economy to decline by an average of 1.1 percentage points annually between 2025 and 2028.

The European Central Bank will announce its latest interest rate decision on April 17. Currently, due to the ongoing threat of economic slowdown, the ECB may cut interest rates in April, but the uncertainty regarding eurozone inflation trends may also force the ECB to adopt a wait-and-see approach. The market's general expectation is that the ECB will cut rates by 25 basis points on April 17, lowering the deposit facility rate to 2.25%. Some economists believe that the European Central Bank's (ECB) interest rate decision on April 17 is becoming easier to make. In addition to the potential direct impact of U.S. tariff policies on the Eurozone economy, the ECB's Governing Council must also consider the effects of the recent strong rise of the euro. Some analysts even argue that the severity of trade shocks actually necessitates more aggressive rate cuts by the central bank. Société Générale stated that the ECB does not rule out a 50 basis point rate cut in April to more clearly exit its restrictive policy stance.

Last week, Goldman Sachs economists raised their expectations for ECB rate cuts, citing a softening growth and declining inflation outlook. Goldman Sachs expects the ECB to cut rates by 25 basis points in April, June, July, and September, and if trade tensions continue to escalate, the number of rate cuts may increase further. The bank originally expected the ECB to only cut rates by 25 basis points in the meetings in April, June, and July.

However, ECB Governing Council member Holzmann believes there is currently no reason to cut rates, as U.S. tariff policies and their potential retaliatory measures make it nearly impossible to predict whether Eurozone inflation will continue to approach the 2% target level. Therefore, pausing action in April is the best choice for policymakers, preferable to hasty measures