- Great uncertainty is restraining economic activity.
- In the short-term, the impact of tariffs on Euro Area inflation is to the downside due to lower demand.
- Most economist assumed the euro would weaken as a result of tariffs. That has not happened.
- If China redirects its exports toward Europe due to excessively high tariffs by the US, if energy prices fall and if the euro strengthens, then tariffs won’t cause inflation to accelerate in the euro area.
- The trade war started by President Trump has created exceptional uncertainty, which reduces euro-area economic growth.
The experience from the trade war 1.0 in 2018 taught that tariffs indeed cause temporary inflation but have also a negative impact on growth which eventually weighs on inflation. Today’s context is very different of course and we will see how this evolves.
This article was written by Giuseppe Dellamotta at www.forexlive.com.