Frankfurt: Like a sleek Mercedes crunched between two freight trucks, Europe’s economy is being knocked off course by the conflict between the US and China over trade.
The bill for damages from the US-China collision could be painfully high, starting this week if new growth figures Wednesday (August 14) show that Europe’s economic motor, Germany, is stalled or shrinking.
Beyond that, economists say there are signs that years of jobs growth since the depths of the Great Recession and the euro zone debt crisis may be ending.
And if the trade wars escalate to include higher US tariffs on cars made in Europe, the picture could look even worse.
The heart of the matter is Germany, Europe’s largest economy and a key trade partner of both the US and China. Almost half the German economy – 47 per cent, according to World Bank estimates – comes from trade as its companies play a dominant role in global markets for luxury autos and complex industrial machinery.
Supply chains from Germany extend into neighbouring countries as well, while German profits are often invested in factories in places like Slovakia, Hungary and Poland.
Great for Germany and Europe when trade is booming – but it means Germany remains more vulnerable than less open economies such as Portugal or France to a slowdown in global trade in goods and services. And that is what’s happening.
Germany has spewed wretched economic data for weeks: an 8 per cent annual fall in exports in June, a 1.5 per cent drop in industrial production in June from the month before, three times bigger than expected.
Surveys of company executives suggest the industrial sector is in recession, with consumer demand and services propping up the economy.
But the damage from trade may be spreading to consumers and companies that do business only at home. While unemployment remains low at 3.1 per cent, job gains have stalled recently.
Ironically, trade between Germany and the US and between Germany and China is holding up pretty well. It’s mainly the uncertainty about the outcome of the clash between US President Donald Trump and the Chinese Communist leadership that has been weighing on business confidence and deterring decisions to invest and buy across global markets.
Last week, Donald Trump imposed a 10 per cent tariff on an additional US$300 billion (S$415.64 billion) in Chinese goods effective September 1.
As a result, research firm Oxford Economics forecasts world trade growth of just 1.2 per cent this year, far below last year’s 4.9 per cent rise.
There are a few small benefits for Europe. While the US and China ramped up barriers against each other, the US has largely kept tariffs on European products the same, except for introducing charges on steel and aluminum imports. China has actually lowered charges on exports from the 19 European countries that use the euro.
