Euro zone growth may be weaker than previously thought and new barriers to global trade could lead to a vicious cycle of trade war with dire consequences for the economy, the vice president of the eurozone said on Wednesday. European Central BankLuis de Guindos.
The euro zone economy has barely grown in the last 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 for higher tariffs, promising that Europe will pay a “big price.”
“Tariffs, trade barriers and protectionism are going to be detrimental to the global economy,” De Guindos said at a conference in London. “I hope that the decisions that are made do not lead to any type of trade war.”
Europe’s open economy relies heavily on foreign trade for growth and a deep industrial recession, due mainly to high energy costs and weak Chinese demand, has kept its growth anemic.
“If you impose a tariff, you have to take into account that the other side is going to react and retaliate and that could lead to a vicious cycle in terms of inflation and tariffs, which could be the worst possible outcome,” he said.
Bleak economic outlook
The ECB has already cut interest rates three times this year due to rapidly slowing inflation, and some monetary policymakers have warned that even faster rate cuts could be necessary given the bleak economic outlook.
Some growth fears were alleviated by surprisingly strong third-quarter data last week, but De Guindos said these were mostly the product of one-off positive shocks, such as the Olympics in Paris, and the overall picture remained being gloomy.
“After a slight recovery in the first half of 2024, the latest economic indicators continue to suggest a weakening of activity in all countries and sectors,” De Guindos said in London. “These latest readings point to a weaker short-term outlook than anticipated by ECB experts in September,” he added.
De Guindos noted that this weak growth data will have a significant impact on the inflation outlook, which will also be affected by the ECB’s interest rates, which remain high enough to restrict economic growth.
De Guindos also said 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 prior commitment.
Markets have priced in another 25 basis point rate cut for the December 12 policy meeting and are also forecasting cuts at each of the ECB’s first three meetings of next year.
It is expected that the deposit type (the entity’s current reference), currently at 3.25%fall below 2% next year and for inflation to reach the 2% target in early 2025.
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