European Central Bank warns rising trade tensions have increased risks
Rising global trade tensions present a risk to the euro area economy, the bloc’s central bank found in its biannual Financial Stability Review out on Wednesday.
The European Central Bank also said weak growth was now a bigger threat than high inflation in the 20-nation euro zone.
The latest figures recorded euro zone economic growth at a two-year high of 0.4% in the third quarter, while headline inflation hit 2% in October.
The ECB said financial markets had experienced a “resurgence of volatility” since the release of its previous report back in May, noting that further fluctuations were “more likely than usual” due to stretched valuations and risk concentration.
“The outlook for financial stability is clouded by heightened macro-financial and geopolitical uncertainty together with rising trade policy uncertainty,” ECB Vice-President Luis de Guindos said.
While Donald Trump’s victory in the U.S. presidential election is not specifically mentioned in the ECB release, countries around the world are bracing for his plan to impose blanket 10% tariffs on all imports to the U.S., which also proposes much higher rates for some nations, such as China. Economists say the knock-on impact of implementing these measures could drag on the euro, if a slowdown in exports spurs the ECB to cut interest rates further and faster.
“Rising global trade tensions and a possible further strengthening of protectionist tendencies across the world raise concerns about the potential adverse impact on global growth, inflation and asset prices,” the Financial Stability Review said.
It also flags concerns rising sovereign debt service costs and the weak fiscal fundamentals of several euro zone member countries. Other concerns include high borrowing costs and weak growth dragging on corporate balance sheets, as well as credit risks for small- and medium-sized companies and lower-income households, if growth slows more than expected.
“In a context of elevated macro-financial and geopolitical uncertainty, there could be a sudden sharp reversal in risk sentiment, given high asset valuations and concentrated risk exposures in the financial system,” the report states.