Escalation of Trade Disputes: An Examination of Economic and Financial Ramifications

In recent times, the global economy has been navigating a turbulent landscape, with geopolitical and inflationary risks looming large. Gold, a traditional safe haven, has touched all-time highs as investors seek refuge in the precious metal.

As we move forward, adaptability and vigilance will be key for managing portfolios in these uncertain times. On the other side of the Atlantic, European policymakers are carefully considering their responses to potential tariffs from the U.S. The sectors most likely to be affected include machinery, transport equipment, including automobiles, and pharmaceuticals.

The European Commission is assessing the situation cautiously, with a focus on minimising adverse effects on the European market. Europe could adopt a targeted approach, focusing on non-essential goods. However, the specifics surrounding the products and countries that will be targeted by new tariffs remain unclear.

The potential for increased tariffs could cause inflation to rise slightly in 2025, with projections moving from 2.1% to 2.3%. This poses challenges for the Federal Reserve due to ongoing uncertainty related to Trump's trade policies.

In 2024, economic growth was well above potential, reaching approximately 2.8% year-on-year. However, the growth in 2025 is expected to slow slightly compared to 2024, aligning more closely with potential growth at around 2%.

The baseline scenario suggests that President Trump is using tariffs as a negotiation tool, not a definitive policy shift. Nevertheless, industries within Europe that have the option to relocate operations to the U.S. to avoid tariffs are at risk.

The European Central Bank (ECB) may find itself compelled to extend its rate-cutting cycle, potentially reaching around 1.5% by the end of 2025. The labor market is a key player in inflation, with a decrease in labor churn helping to keep downward pressure on wages and supporting a positive outlook for inflation.

However, there is an increasing disparity within the consumer sector. High earners are benefiting significantly from sustained high incomes and a rising stock market, while lower-income consumers are beginning to feel the strain due to depleted pandemic-era savings and slower wage growth.

Countries with the largest exposure to U.S. markets, such as Germany and Italy, would experience the most severe impacts. The European countries with the largest exposure to the US market, including Germany, Switzerland, and other Eurozone countries with significant export shares to the US, are most affected by possible US taxes on European goods.

In the alternative risk scenario, a 10% increase in tariffs on European goods could lead to a potential reduction in GDP growth of approximately 0.4 percentage points in 2025. This underscores the need for European policymakers to remain vigilant and adaptable in their responses to these trade tensions.

According to a report by the CIB Research team, which includes economists such as Cyril Regnat, Christopher Hodge, Jesus Castillo, and Emilie Tetard, tariffs could put an upward shift on consumer prices in the short term. The potential for increased tariffs and the impact of decreased legal and illegal immigration will put upward pressure on wages, but the impact of this is not expected until 2026.

In conclusion, the global economy is facing a complex web of challenges, with geopolitical and trade tensions adding to the uncertainty. As we move forward, it will be essential for policymakers and investors to remain adaptable and vigilant in navigating these uncharted waters.