Euro-area growth slows as trade fears mount

Bloomberg

Protectionism is starting to weigh on the euro area’s economy. Growth in the region softened in July on weaker new orders and deteriorating confidence, according to a survey published on Tuesday. More worryingly, companies reported rising prices for raw materials, delivery delays and shortages, suggesting that tariffs — or the threat thereof — are already starting to disrupt global supply chains.
The report from IHS Markit comes just days after a meeting of central bankers and finance ministers from the Group of 20 nations. They said that trade tensions are threatening global growth, echoing multiple warnings since US President Donald Trump started a tit-for-tat tariff battle with China and the European Union.
In China, concern has reached such a level that authorities unveiled a package of policies to boost domestic demand to cushion the economy from the fallout from the trade dispute.
There’s also an inflationary impact, with companies raising prices to make up for the cost of the tariffs. Royal Philips NV Chief Executive Frans van Houten said this week that it’s difficult to estimate what future tariffs may mean but they will “have to be passed on” through higher prices.
The euro-area composite Purchasing Managers Index for manufacturing and services fell to 54.3 in July from 54.9 in June, a sharper drop than economists had forecast. A measure of expectations fell to a 20-month low. “Given the waning growth of new business and further slide in business optimism, the outlook has also deteriorated,” said Chris Williamson, chief business economist at Markit. For manufacturers, the survey saw trade worries “intensify markedly,” he said. The pressure on the economy could increase, with Trump threatening tariffs on European cars. Shares of German automakers have taken a hit, and EU Commission President Jean-Claude Juncker is traveling to Washington this week in an effort to ease tensions.
He won’t come unarmed. The EU has vowed to retaliate against any import duties, and China has also said it will match American sanctions on its exports. In Germany, the PMI improved in July, though Markit noted that business confidence is “subdued.” The index for Japan, also published on Tuesday, showed manufacturing lost steam in July, growing at the weakest pace since 2016.
Williamson said the big question is the extent to which domestic demand can cushion the euro-area economy. At the moment, it can count on falling unemployment and consumer spending to support its expansion. European Central Bank policy makers meeting on Thursday will thoroughly
analyze the data for any hints of more severe risks to the outlook. “For now, the health of domestic demand seems encouragingly solid, but any feed-though of trade worries to other sectors will be a key area of concern to an already cloudier-looking outlook,” Williamson said.