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European Economy Slows Further

Business leaders are concerned about the impact of new import taxes imposed by US President Donald Trump on global steel and aluminum imports and on a range of Chinese goods
European Economy Slows FurtherEuropean Economy Slows Further

Europe’s economy slowed further in the second quarter amid concerns over global trade disputes, official figures showed Tuesday.

Growth in the 19 countries that use the euro currency eased to a quarterly rate of 0.3%, weaker than markets had expected and down from 0.4% in the first quarter. Fear that new tariffs will slow global commerce has been weighing on the outlook in the Europe, which is heavily dependent on trade, AP reported.

Despite the recent slowdown, the economy is coming off a good year, and output was up a robust 2.1% from the second quarter a year earlier.

The slowdown in growth has not been sharp enough to keep the European Central Bank from moving ahead with plans to slowly withdraw its monetary stimulus, which has been providing in the form of bond purchases and record low interest rates. The bank says it will stop the bond purchases, which help make credit cheap, by the end of the year and could start raising interest rates after the summer of 2019.

ECB President Mario Draghi has described the slowdown in the first six months of the year as a pullback from extraordinarily high rates of growth last year, and not as a sign of looming recession. Growth went as high as 0.7% quarter on quarter in both the third and fourth quarters of last year.

Surveys of business confidence have recently indicated that business leaders are concerned about the impact of new import taxes imposed by US President Donald Trump on global steel and aluminum imports and on a range of Chinese goods. The Chinese retaliated against US products including autos and soybeans. So far, the trade disputes seem to be affecting confidence but that has not feed through strongly to dampen actual economic activity.

 Other Factors at Work

Separate figures from the European Union’s statistics agency showed that the unemployment rate was unchanged in June at 8.3% and annual inflation rose in July to 2.1% from 2% the previous month.

The eurozone economy entered 2018 on a high, having racked up its most rapid expansion in a decade during 2017. However, growth slowed sharply in the first three months of this year, a setback policymakers and many economists attributed to unusually cold weather and a series of labor strikes in Germany and France. However, the failure of the economy to rebound in the second indicates that other forces are at work.

While Eurostat didn’t provide any details of how different parts of the economy performed, previously released data and business surveys point to a fall off in export growth during the first half of 2018 and a waning of business optimism that appears to be linked to growing trade tensions between the US and the EU, as well as uncertainties about access to UK markets after that country leaves the bloc next year.

Confidence may rebound if there is progress in talks to resolve trans-Atlantic tensions announced July 25 by Trump and European Commission President Jean Claude Juncker.

Higher oil prices are another headwind, since they eat into households’ spending power.

The ECB confirmed Thursday it will press ahead with plans to end its bond-buying stimulus program in December, but a lengthening period of weaker growth may make it reluctant to raise its key interest rate in 2019.

 A Distant Threat

“The strength of economic growth means our economy risks hitting full capacity, which gives rise to the risk of overheating or boom-bust cycles,” Mark Cassidy, director of economics at the Central Bank of Ireland warned Tuesday.

That worry might seem like a very distant threat to his counterparts in Greece and Italy, which have lagged throughout the eurozone’s recovery, now entering its sixth year.

Italy’s unemployment rate rose to 10.9% from 10.7% in June. Among people aged less than 25 years, the jobless rate rose to 32.6% from 32.2%.

While Italy has barely escaped stagnation, Spain’s economy has been the fastest-growing of the eurozone’s four largest members since the recovery began in mid-2013. However, it also slowed in the three months through June, recording its weakest expansion in four years.

Meanwhile, Inflation in Germany eased back slightly in July, preliminary data showed Monday, but still surpassed the level targeted by the European Central Bank. Prices added 2% year-on-year, federal statistics authority Destatis said, compared with 2.1% in June.

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