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October 22, 2019

Trade wars already starts affecting the economy

Benoit CoeureThe fear of trade wars, triggered by US ideas on import duties for Chinese goods, is already affecting the development of the economy. The fears affect borrowing costs and stock prices, Benoit Coeure, a member of the European Central Bank (ECB).

“None of this supports economic growth or employment”, said he. “The effect of anticipated trade wars is already visible in terms of loans and investors. However, the impact of trade disputes on inflation will be reflected in a longer-term perspective”, added Benoit Coeure. “Reducing stock prices in response to the US announcement of imposing increased tariffs on steel and aluminum and uncertainties about the scope of any retaliatory measures have already contributed to tighter financial conditions”, said also the ECB representative.

Markets are beginning to speculate and whether the slowdown in the economy caused by global trade friction could delay the end of the ECB’s quantitative easing program and the key interest rate policy.

With inflation below 1.5%, the analysts expect the ECB to take measures to raise interest rates in the middle of 2019 alone. But the markets are beginning to wonder how the bank will react to declining stock prices and the slowdown in some economic activities in the Eurozone.

Benoit Coeure does not signal what the ECB’s actions will be. But he warns that the impact of trade wars on the economy will be in terms of slowing growth and declining employment.

Banks already have simulations of retaliation. In their view, imposing 10% import duties on all US goods will slow the global economy by 1% in the first year. The United States will be hardest hit. The Eurozone will also feel worsened, though the decline will be weaker.

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