|
|
Increasing global trade tensions have raised concerns about the potential adverse impact on global growth and asset prices. The US administration has introduced several protectionist measures in the form of tariffs on goods produced in China, which has promptly retaliated. Across a wide range of public institutions, the consensus view put forward is that trade barriers can slow down economic growth in the short term and productivity growth in the longer term.
In particular, a further escalation of trade tensions to a broader set of countries has been assessed to have significant adverse effects on the global economy. However, less light has been shed on the potential impact of an escalation of trade protectionist measures on financial stability more generally and asset prices in particular.
The recent implementation of protectionist measures poses no imminent risk to global financial stability. The share of goods that are subject to tariffs in global trade volume is relatively small. In addition, the nature of the trade dispute, which has so far mostly been contained to a bilateral tariff conflict between the United States and China, has only led to financial market reactions in some market segments.
In the short term, overall euro area asset prices are therefore not imminently exposed to a further bilateral trade conflict between the United States and China.
However, an escalation to a more generalised trade war could lead to a significant decompression of risk premia and strongly declining equity prices in the euro area.
Strong financial market corrections related to protectionism are globally only likely in the event of a significant broadening of the countries involved or of an application of sizeable tariff rates to a considerable additional share of goods. If this were to materialise, factors such as financial stress in EMEs could act as an amplifier.
For the euro area, financial variables would be severely affected in the case of a full-blown trade war, in which all countries would start to impose tariffs on each other. These effects would be transmitted directly (e.g. through lower corporate earnings and higher credit risk), as well as indirectly (e.g. through higher uncertainty and adverse effects on international investors’ confidence).