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Europe Increasingly at Risk from Ongoing US-China Trade War

10 June 2019Europe
Ongoing US-China Trade War Increases Risks for Europe - Market Insights by Citibank UK

The US-China trade war is already impacting European manufacturers as European economies are very exposed to China (5.8% of net trade) and to the US (6.3% of net trade). There is also now a growing likelihood of the trade tensions extending directly to Europe. Areas to be renegotiated with the US are cars, aircraft subsidies, LNG and agriculture.

Against this backdrop, the European Central Bank (ECB) sounded a more dovish note on 6 June than at its previous meeting –

  • Stronger 2019, weaker 2020: The ECB upped its growth and inflation forecasts for 2019 (1.2% and 1.3% respectively), while reducing forecasts for both for 2020.
  • Lower rates for longer: While leaving its deposit and refinancing rates unchanged, the ECB sees greater likelihood of rates staying at these low levels through mid-2020.
  • Boost for bank lending: The third TLTRO's interest rates were set at 10 basis points above the main refinancing rate (0.0%), while banks that exceed their lending benchmark will pay 10 basis points above the deposit rate (-0.4%).

Euro- area Real GDP Growth and ECB Projections amid US-China Trade War - Market Insights by Citibank UK

Past performance is no guarantee of future results, real results may vary. Forecasts are expressions of opinion, are not a guarantee of future results and are subject to change.

The growing likelihood is that the ECB may need to adopt further easing measures in the months ahead, assuming the US-China trade war escalates further. This may keep the Euro under pressure, while also making it possible that expensive bonds could get even more expensive, at least in the short-term. Even with further ECB dovishness, equities face earnings pressure as the trade war may impact business sentiment and hence supply chains starts may have more impact.

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