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Trade wars, falling export demand may hit eurozone, ECB warns

Growing trade and political tensions around the world, but chiefly between the U.S. and China, are beginning to weigh on international commerce and have the potential to derail the economic recovery of the eurozone, according to minutes published by the ECB on Oct. 11.

Regulators cut estimates for future economic growth in the eurozone by 0.1% for both 2018 and 2019, forecasting a GDP expansion of 2% in 2018 and 1.8% in 2019.

"The revisions were mostly attributable to a weaker than previously expected contribution from net trade, reflecting downward revisions to foreign demand and a stronger effective exchange rate of the euro," the minutes of the Sept. 13 meeting noted. The council added that the trade momentum in the euro area had also weakened especially in relation to Asia, which is feeling the effects of trade tensions with the U.S. and going through a wider economic slowdown.

"Risks relating to the threat of protectionism, vulnerabilities in emerging markets and financial market volatility had gained more prominence recently," the ECB said, noting that the threat was not yet severe enough to determine a change in the ECB's overall economic outlook, which regarded the eurozone economy as resilient. But a deteriorating global economy could yet impact Europe, the ECB's leaders warned.

"In addition to any direct effects arising from the imposition of tariffs, concerns were expressed about the possibility that trade tensions could generate a more general decline in confidence throughout the global economy."

The eurozone, traditionally highly reliant on exports, was beginning to feel the effects of declines in global orders and export orders, the ECB said. "Caution was seen as warranted since heightened uncertainty in the global environment might yet impact the euro area more significantly over time."

Internal factors such as a tightening labor market driving up wages, and a stronger currency, are also contributing to the slight drop in competitiveness, said the ECB. On the flipside, the same indicators were conducive to a higher rate of inflation, which the ECB said was positive.

The ECB maintained its key rates at previous levels, including the deposit facility at negative 0.4%, projecting that any hike is unlikely to come earlier than summer 2019, the summary of the regulator's Sept. 13 meeting shows.

Purchases of government and corporate bonds are going to be ended in December, as previously announced, but maturing paper will be reinvested in similar assets, the ECB said, preventing its stock of debt from diminishing.