"Europe, the big loser" - ECB: European Union will suffer the consequences of the US-China trade war
European Central Bank interest rates are likely to fall further as inflation eases, official sources at the institution said, warning that the US administration's trade war with China could have a major impact on the eurozone.
The central bank has cut borrowing costs five times since June, with investors seeing at least three more rate cuts this year in an effort to boost the economy.
But higher energy prices and global trade tensions are pulling the institution in another direction. The main uncertainty relates to US trade policies, and this could hit Europe hard, even before any direct trade barriers on the bloc.
"What worries me most is if President Trump engages in a full-blown trade war with China. That is a more serious threat because China has 35% of the world's manufacturing capacity," the board members said.
The US imposed a 10% tariff on all Chinese imports this week, prompting retaliatory measures from Beijing. Restricting access to the US would force China to find other markets and could sell products at a discount to Europe, curbing growth and prices.
Models compiled by Washington's Peterson Institute for International Economics concluded that while the US would be hit by tariffs, the country would suffer less than any of its targets.
However, firms could absorb some of the higher costs, sacrificing profit margins, while the inevitable weakening of the euro against the US dollar would also limit the damage. Trade disputes could drag down economic growth, but not enough to trigger a recession, especially as other sectors of the economy are showing resilience, Central Bank sources say.
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