European Central Bank warns of sharp slowdown in global trade
According to the ECB's June 2025 macroeconomic projections, global import growth is now expected to reach 3.1 per cent in 2025, down by 0.4 percentage points from previous estimates.
The outlook for 2026 is more severe, with growth forecast to drop to 1.7 per cent, a sharp downward revision of 1.4 percentage points.
The ECB attributes the slowdown to the impact of recent US tariff increases on various imports and broader policy uncertainty across international trade channels.
On the other hand, the ECB noted several positive factors that could support the eurozone economy and enhance its resilience. These include increased government spending on defence and infrastructure, rising real household income, a strong labour market, and improving financing conditions.
Meanwhile a marked spike in uncertainty across global trade, defense, international cooperation and regulation policies could prove challenging for financial stability, according to the May 2025 Financial Stability Review, published by the European Central Bank (ECB).
Frequent shifts and reversals in tariff policy, alongside significant changes in the geopolitical environment, could have major economic and financial impacts. While global macroeconomic imbalances remain a long-standing issue in the policy debate, it is not clear that tariffs are the best-placed policy instrument to address them.
'Rising trade frictions and related downside risks to economic growth are weighing on the outlook for financial stability', said ECB vice president Luis de Guindos, in a statement. The significant increase in trade policy uncertainty and trade frictions triggered large spikes in financial market volatility and raised the risk of an economic slowdown.
Financial markets across the globe sold off at an unsettling speed in early April, and financial conditions tightened notably. While risky assets had fully recovered their initial losses by mid-May, markets are still highly sensitive to tariff-related news. Equity markets in particular remain vulnerable to sudden and sharp adjustments as valuations are still high and concerns over risk concentrations persist. In an environment of heightened market volatility, euro area non-banks' liquidity and leverage weaknesses could be revealed, amplifying market shocks.
Jo Burnham, margin expert at OpenGamma, said in emailed commentary: ' As the ECB's review highlights, growing uncertainty is fueling market volatility — a trend the shadow banking industry, in particular, must take seriously. Just last month, we saw how Washington's tariff plan triggered a wave of volatility, driving margin calls across equities, commodities, foreign exchange, and beyond. In periods of extreme turbulence, global clearing houses are demanding more collateral from their members as asset values fluctuate.'
'With markets remaining on edge there is growing need for firms to improve their operational resilience, ensuring they have the tools in place to navigate margin requirements and optimise the ways that they are met.'
Amid escalating global trade tensions, the European Central Bank (ECB) has raised serious concerns about the economic fallout from a prolonged trade war. In a stark assessment delivered on April 29, ECB Executive Board member Piero Cipollone projected that the Eurozone could face notable declines in growth and investment, coupled with a disinflationary environment, if trade disruptions persist.
Economic Drag from Trade Fragmentation
Cipollone emphasized that the Eurozone may see business investment decline by approximately 1.1 per cent in the first year of a full-scale global trade conflict.
Moreover, the region's real GDP growth could fall by 0.2 percentage points between 2025 and 2026. Additional volatility in global financial markets, which has already emerged in the wake of US protectionist policy moves, could contribute another 0.2 percentage point decline in GDP by 2025.
While the impact on inflation remains ambiguous, Cipollone stressed that in the short to medium term, the consequences might be disinflationary rather than inflationary—undermining already tepid price growth across the Eurozone. These projections reinforce the market's expectations for a rate cut at the ECB's upcoming June 2025 meeting, as policymakers seek to cushion the economy against external shocks.
Shift Away from a Dollar-Dominated Global System
The ECB's warning also reflects broader structural changes in the global economy.
Cipollone underscored the risks posed by an increasingly fragmented global trade system. As the US pursues aggressive tariff policies, the long-term effects—slower growth, persistent inflation, and ballooning public debt—could undermine trust in the dollar's dominance as the world's primary reserve and trade currency.
This erosion of confidence in U.S.-led financial architecture, Cipollone warned, could accelerate the emergence of alternative regional systems and weaken global economic cohesion.
Central Banks Urged to Strengthen Crisis Readiness
In light of these risks, the ECB board member urged central banks to prepare for potential capital flight, payment system disruptions, and heightened currency volatility. This includes developing robust contingency plans and crisis management frameworks.
Cipollone also called on G20 nations to reaffirm their commitment to open trade and resist protectionist impulses that risk triggering 'beggar-thy-neighbour' dynamics, which harm global economic stability. He suggested convening a high-level international trade summit to reinforce collective action and promote more equitable economic adjustment across countries.
Policy Urgency Amid Systemic Transition
As the Eurozone teeters on the edge of disinflation and slowing investment, the ECB's message is clear: the consequences of uncoordinated trade policies now extend far beyond tariffs and balance sheets. They are reshaping the architecture of the global economy itself.
While short-term stimulus, such as interest rate cuts, may help buffer the impact, the deeper challenge lies in preserving international cooperation in an increasingly multipolar and protectionist world.
The ECB's call for collective action may be one of the last efforts to prevent fragmentation from becoming the new normal in global trade.
Agencies
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