Escalation of Trade Disputes: Economic and Financial Repercussions
Consumers at the lower end of the income scale in many countries have seen an increase in purchasing power over the past two years, primarily due to wage gains. However, this positive trend may be affected by the potential for increased tariffs, particularly in the United States.
The specifics surrounding the products and countries that will be targeted by new tariffs are unclear, but machinery, transport equipment, and pharmaceuticals are among the categories likely to be affected. Countries with the largest exposure to U.S. markets, such as Germany and Italy, would experience the most severe impacts from potential tariffs. Similarly, China, Mexico, and Canada, which have the largest market extension in the U.S., could be the most affected by the tariff increases instigated by the Trump administration.
The potential for increased tariffs could cause inflation to rise slightly in 2025, with projections moving from 2.1% to 2.3%. This could pose challenges for the Federal Reserve, as there is a real risk that inflation could stabilize around 2.5% year-on-year. In response, the European Central Bank (ECB) may extend its rate-cutting cycle, potentially reaching around 1.5% by the end of 2025, leading to five additional rate cuts rather than the three currently anticipated.
Economic growth in the US is expected to slow slightly in 2025 compared to 2024, aligning more closely with potential growth. This slowdown, coupled with the potential for increased tariffs, could put upward pressure on wages in the U.S., a factor that, when combined with a decrease in legal and illegal immigration, adds complexity to the inflation picture.
The consumer sector is experiencing an increasing disparity, with high earners benefiting significantly from sustained high incomes and a rising stock market. In contrast, lower-income consumers are beginning to feel the strain due to depleted pandemic-era savings.
Europe could adopt a targeted approach to mitigate potential damage from tariffs, focusing on non-essential goods. This strategy could help to reduce the impact on consumers while still addressing the concerns of industries affected by the tariffs.
Gold has emerged as a viable hedge against geopolitical and inflationary risks, touching all-time highs recently. Markets have been volatile, with a significant divergence between U.S. and European equities.
The baseline scenario suggests that President Trump is using tariffs as a negotiation tool, and they might not be fully implemented. However, an alternative risk scenario anticipates a 10% increase in tariffs on European goods, which could reduce GDP growth by approximately 0.4 percentage points in 2025.
The CIB Research team, consisting of Cyril Regnat, Christopher Hodge, Jesus Castillo, and Emilie Tetard, is cautiously assessing the potential impacts of U.S. tariffs. Their research provides valuable insights into the economic implications of these policies and helps policymakers navigate the complexities of this global issue. By 2026, inflation is anticipated to decrease to 1.6%, down from 1.8%.
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