US tariffs will likely dent growth prospects in Central Europe, S&P Global says

By Gergely Szakacs

BUDAPEST (Reuters) - U.S. President Donald Trump's proposal to impose 25% tariffs on imports from the European Union is likely to dent growth prospects in Central Europe, compounding existing fiscal challenges, S&P Global Ratings told Reuters.

Trump said last week his administration would soon announce the tariffs on goods from the EU, which the Republican leader said had been created to "screw" the United States.

The European Commission has said it would react "firmly and immediately" against barriers to free trade, as U.S. duties on imports from Canada and Mexico come into effect on Tuesday.

S&P Global, in response to questions about the potential impact of the tariffs, said that while Central and Eastern Europe's direct trade exposure to the U.S. was limited, growth prospects were likely to be hit through the German car sector.

"This is particularly the case with Czechia, Hungary, Slovakia, Slovenia and Romania," it said, adding that machinery and transport equipment exports to Germany accounted for more than a tenth of these countries' total exports.

Central European nations are among the EU's most reliant on foreign trade, with exports as a share of output ranging from 92% in Slovakia to 69% in the Czech Republic, based on 2023 Eurostat data, with only Romania's 39% below the EU average.

Poland, Central Europe's largest economy, is seen as less exposed to weakness in Western Europe due to a lower reliance on car exports, a large internal market and the receipt of billions of euros of EU recovery funds.

Hungary's forint and the Czech crown fell past key levels and the zloty retreated from a 10-year high on Friday as the tariff threats weighed.

Capital Economics Emerging Europe analyst Nicholas Farr said a 25% U.S. tariff on EU imports would curb growth by some 0.5% of gross domestic product on average in Central Europe - a larger hit than previously assumed in a more benign tariff scenario.

That could dampen recovery in a region where growth slowed sharply as inflation surged following Russia's 2022 invasion of Ukraine, with weakness in major trading partner Germany adding to headwinds.

However, S&P Global said falling Chinese demand for German cars would likely have a larger effect on Central European growth than U.S. tariffs, pointing to Volkswagen, Mercedes and BMW for which it said China sales accounted for around a third of the total, compared to 10-15% for the U.S.

"Weaker growth in CEE sovereigns could compound their existing fiscal challenges, which we have long highlighted as one of the key risks in the region," it said.

The European Commission launched a disciplinary procedure against seven EU members over their large fiscal deficits last year, including Hungary, Poland and Slovakia, while Romania's government is grappling with the largest shortfall in the bloc.

(Reporting by Gergely Szakacs; Editing by Kirsten Donovan)