Trade war would weigh on Europe’s already weak outlook, ECB warns

LONDON: Euro zone growth may be weaker than earlier thought and fresh barriers to global trade could lead to a vicious circle of trade war with dire consequences for the economy, European Central Bank Vice President Luis de Guindos said on Wednesday.

The euro zone economy has barely grown in the past year and Donald Trump’s return to the White House as US president is likely to be bad news for the bloc as he campaigned on higher tariffs, promising that Europe will pay a “big price”.

“Tariffs, trade barriers, protectionism is going to be detrimental to the global economy,” de Guindos said at a conference in London. “I hope the decisions taken do not give rise to any sort of trade war.” Europe’s open economy relies heavily on foreign trade for growth, and a deep industrial recession, mostly because of high energy costs and weak Chinese demand, have kept its growth anaemic.

“If you impose a tariff, you have to bear in mind that the other party is going to react, and it’s going to retaliate, and that could give rise to a vicious circle in terms of inflation, tariffs, which could be the worst possible result,” he said.

DISMAL ECONOMIC OUTLOOK

The ECB has cut interest rates three times this year on slowing inflation and some policymakers have warned that even quicker rate cuts may be needed given a dismal economic outlook.

Some growth fears were alleviated by surprisingly strong third-quarter data last week but de Guindos said these were mostly due to one-off positive impacts, such as the Olympic Games held in Paris, and the overall picture remained bleak.

“After a mild recovery in the first half of 2024, the latest economic indicators continue to suggest a weakening in activity across countries and sectors,” de Guindos said. “These latest readings signal a weaker near-term outlook than projected by ECB staff in September.”

He said these poor growth readings would have a material bearing on the inflation outlook, which was also affected by ECB interest rates that are still high enough to restrict economic growth. De Guindos said that disinflation was on track, repeating the bank’s standard guidance, but stopped short of promising further rate cuts, adding that incoming data would determine the ECB’s next move and there was no pre-commitment.

Markets have fully priced in another 25-basis-point rate cut for the bank’s policy meeting on Dec. 12 and also see cuts at each of the first three ECB meetings next year.

The 3.25% deposit rate is then seen dipping below 2% some time next year as inflation is expected to hit the bank’s 2% target in early 2025.