Talking Heads – Zollturbulenzen trüben Europas Wirtschaftsaussichten

This is an edited audio transcript of the Talking Heads episode with Mario Pietrunti

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing the latest tariff turmoil and the implications for Europe. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Mario Pietrunti, Senior European Economist. Welcome, Mario, and thanks for joining me.

Mario Pietrunti: Thank you, Daniel. Glad to be here.

DM: We appreciate anything we discuss could be changed by the headlines at any moment. In the near term, we can think about a scenario where you have some relatively low level of tariffs applied by the US towards Europe, 10% or 20%, and then we see what negotiations might take place for specific sectors or areas. At the same time, we appreciate the high degree of uncertainty. What do you see as some of the implications for growth for Europe?

MP: Let me start from where we were only last month. The mood in Europe was completely different given the positive news around the big stimulus package in Germany. That could have had material implications. Now, the recent trade developments have completely offset this positive confidence shock and there’s more pessimism across Europe. However, the direct impact of the tariffs from the US on growth for us is rather contained. Let’s not forget that the US is 20% of total exports of goods from Europe. Then you have to make assumptions on the actual size of the tariffs. Let’s assume that they stay at 10% indefinitely. There’s another factor that will lead to a rather contained impact on European growth: the fact that Europe essentially sells finished goods to the US is and is not as heavily involved in America’s supply chains as other countries are, such as Mexico or Canada.

The indirect impact at the global level could be much, much higher on European growth if we turn towards monetary policy. What is the ECB to do about all of this? I’d wonder if it’s a bit easier for the ECB than it is for the US Federal Reserve. For the ECB, I’d imagine they’re focusing more on the growth outlook. This extreme level of trade policy uncertainty is taking a toll on business investment and this is clearly negative for growth: it lowers the growth prospects for businesses and households. This is clearly first order for the ECB in the short run. This is why we think the ECB will keep cutting [rates} at least for the next couple of meetings.

For us, there are two factors that may induce the ECB to be more cautious in the medium term and avoid easing too much. One is the risks around inflation. On the one hand, this trade uncertainty and higher tariffs could be disinflationary in that global demand for goods may fall, but at least in the short term, the total supply of goods will remain unchanged, so we will have more goods available. This should put a downward pressure on prices. On the other hand, you could have inflationary pressures from, for example, dislocation of supply chains leading to a rising input costs or from retaliatory policies. On this, we won’t have much clarity at least until after the summer. Until then, a significant shift in ECB policy is unlikely.

The other factor that will induce the ECB to be rather cautious in the long term is the fact that you’re going to have a big fiscal stimulus, especially in Germany. This would lead to higher productivity, higher GDP growth on a structural basis and this should lead to real rates settling on a higher level in the long run.

DM: We’re quite optimistic about Europe not so long ago when we were thinking about all this potential increased spending across the EU. At the same time, we also know that high levels of regulation and labour market rigidities are another key issue. With that in mind, I think about the cliche that Europe only changes when there’s a crisis. Can Europe take advantage of that and make changes that arguably should have been made a long time ago?

MP: We see several opportunities in the long term for Europe. First, let me mention that all this geopolitical uncertainty provides strong incentives to Europe to diversify its export markets and thinking of, for example, mending ties with the UK, but also opening up to emerging markets, especially in in Asia. The other side of the coin is this increased willingness in Europe to do more. Especially in Germany, we had essentially a fiscal reset that may be a very powerful tailwind for Europe as a whole. Here, we’re talking about half a trillion (euro) of public investment in infrastructure over the next 12 years, plus potentially unlimited defence spending. Given that fiscal rules do not apply, that is large enough to move the needle on European growth. On our estimates, European growth could be lifted by half a percentage point on a structural basis. This is clearly a game changer for Europe.

DM: If I can summarise some of the insights that you shared, you crucially pointed out that the optimism that we had around Europe a few weeks ago with the outlook for increased fiscal stimulus,  particularly in Germany, that hasn’t gone away. We need to think of this tariff shock in that context. To some degree, the tariffs may offset some of the growth impulse from that fiscal stimulus. If we consider how the tariff shock is going to change the thinking for European politicians in so far as they may be willing to make greater changes to do more to revitalise growth, from that point of view, we should be more optimistic. You also pointed out that the direct impact of modestly higher tariffs on European growth is not necessarily so extreme. Finally, the ECB, at least in the short term, is going to keep cutting [rates] to support growth, though we’ll have to think about in the medium term what the inflationary implications are. Well, Mario, thank you very much for joining me.

MP: Thank you, Dan. Pleasure.

DM: That’s it for this week’s episode of Talking Heads. If you would like more information, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas-am.com. We recommend subscribing to Talking Heads on your favourite podcast channel such as YouTube or Spotify. If you like Talking Heads, leave us a positive review and a nice rating. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Mario Pietrunti, Senior European economist. Please do join me next week. Until then, take care.