Eurozone: Can growth continue amid global economic headwinds?

As trade tensions between the U.S. and China compound a wider slowdown in global trade, what is the knock-on effect on the eurozone?
23 September 2019 •

European companies might seem removed from the arena of conflict, but any turbulence in global trade flows renders the 19-nation bloc vulnerable.

That is because the eurozone is heavily reliant on overseas demand for its goods — its export-oriented economies have historically driven its growth.

“Europe’s reliance on trade is extraordinary,” Ashoka Mody, a Princeton University economics professor and former International Monetary Fund official recently told The Wall Street Journal. “It’s an almost ironclad law: when world trade growth slows, Europe’s growth in the next year slows.”

Slower economic growth

Data from the European Union’s statistics office, Eurostat, shows that growth in the gross domestic product (GDP) in the eurozone slowed in the second quarter of 2019. The rate dropped to 0.2 percent, after 0.4 percent growth in the first quarter.

Among the larger eurozone economies, Spain showed the highest growth dynamic, at 0.5 percent. France grew slightly (0.2 percent), while Italy’s growth ground to a halt.

Meanwhile, Germany’s GDP fell 0.1 percent quarter-on-quarter. With exports waning, the country is experiencing collateral damage caused by the trade war between China and the U.S. German carmakers and other companies rely on sales in China, where growth has slowed partly due to the Trump administration’s tariffs on Chinese goods.

China is the world's largest automobile market.
China is the world's largest automobile market.

As Europe’s largest economy, Germany has historically driven growth across the bloc, and its current economic situation could be a sign of what is to come for the rest of the eurozone.

A decline in industrial production

Industrial output in the eurozone has been declining since early 2018, and as Eurostat’s latest data shows, that trend continues. Industrial production growth fell by 2.6 percent in June from the same month in 2018.

Here again, Germany’s current slump points to wider implications for the rest of Europe. German industry leads Europe’s exports to the U.S. and Asia, while surrounding European countries feed Germany’s supply chains. When Germany’s industrial production falters, the companies across Europe that sell to it would also likely be affected.

Industrial production in the eurozone is usually driven by exports, along with investment. Without a rebound in global trade flows, exports alone will not be able to drive manufacturing output and, in turn, eurozone growth.

However, that rebound is unlikely to materialize in the immediate future. DHL's Global Trade Barometer reveals that global trade is expected to decline — the global index in June 2019, at 48 points, represents a 20 percent drop over six months.

Global Trade Barometer June index

“The question is whether governments are willing to provide additional support if downside risks [of a broader possible downturn] were to materialize,” said Bert Colijn, a senior economist at ING Bank. The European Central Bank (ECB) has also hinted it is drawing up plans to stimulate the economy.

Resilient in the face of trade headwinds

An ongoing slowdown in global trade flows will inevitably have repercussions for the eurozone’s economy.

A key issue for the bloc is how long its economy can remain insulated from global trade headwinds should industrial production experience a prolonged downturn. Then there are the current uncertainties surrounding the Brexit negotiations, another potential source of risk. These could be compounded by increased financial market stress and a loss of confidence.

Yet, despite the bleak economic outlook, there have been some positive takeaways.

An encouraging trend cutting across the bloc relates to labor market performance, with employment in the eurozone continuing to grow, following a rise of 0.4 percent in the first quarter of 2019.

Data from the ECB shows that eurozone unemployment fell from a peak of more than 12 percent in 2013 to 7.5 percent in June 2019.

Wage growth has also picked up, and households in most countries have received a fiscal boost. France’s government has cut taxes and raised the minimum wage, while Germany plans to spend more on care, pensions and child benefits.

Services, which account for 60 percent of the eurozone’s economy, are also propping up the zone’s growth, fueled by robust domestic demand. Consumer spending is still growing, thus supporting employment. Looking ahead, rising real wages should continue to underpin disposable income growth.

As Bert Colijn, senior economist at ING explained: “As long as employment remains stable, an outright eurozone recession remains unlikely.”

While trade tensions continue to cast a shadow on the bloc, tentative signs suggest the eurozone is holding up. For now, at least.

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