New Delhi, April 4: Europe's fragile economic outlook amid geopolitical tensions could have ripple effects on India's trade and sectoral competitiveness, with India potentially benefiting from a free trade agreement (FTA) with Europe, a new report has said.
The report, from EY, noted that India could gain from deeper trade engagement with Europe and increasing competitiveness in sectors such as textiles.
Changes in tariff and trade policies by the United States, as well as the West Asian conflict, will act as headwinds for Europe's economy, potentially affecting global trade flows and competition with countries like India.
The report highlighted that the recently announced EU-India Free Trade Agreement (FTA) could have mixed sectoral implications for European industries while creating competitive pressure in some segments. "While the overall macroeconomic impact on Europe is negligible, the sectoral effects are somewhat more meaningful," the report said.
European industries, particularly the textile industry, could face stronger competition from India. While the mineral sector may benefit from improved access to production inputs.
US tariffs will shave 0.5 percentage points off the EU's GDP growth in 2026, with the most negative effects concentrated in Ireland and Nordic countries, according to the business advisory firm. However, it maintained that the euro area economy is likely to grow, though at a modest pace, before it gradually recovers.
"The headline euro area growth is expected to slow to 1.3 per cent in 2026 from 1.5 per cent in 2025... Growth should re-accelerate to 1.4 per cent in 2027 and 1.5 per cent in 2028-29," the report said.
Geopolitical tensions in the Middle East could affect global energy prices and raise inflation in Europe by 0.3 percentage points in 2026 and reduce GDP by 0.2 per cent.
Aging populations and labor shortages could weigh on Europe's long-term growth prospects, especially in Central, Eastern, and Southern Europe.
Investments in new technologies such as artificial intelligence could provide a boost to Europe's productivity and economic output in the coming decade.
"AI could raise Western Europe's GDP by up to 4 per cent by 2033," the report noted, though it cautioned that Europe risks lagging the United States in AI investments.
A major disruption, such as a blockade of the Strait of Hormuz, could have much larger economic consequences, it warned.
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