Europe looks like the real weak link in the global economy


  • Business
  • Thursday, 14 Feb 2019

Protests halt spending: Tourists take selfies as artists draw portraits outside cafes in Paris. Household spending has also ground to a halt in France, which is beset by the Yellow Vest protests.— Bloomberg

PARIS: For all the palpitations that the trade war between the US and China will knock out their economies, it is Europe that increasingly looks like the biggest threat to global growth.

Deteriorating demand is evident across the 19-nation eurozone as it finds itself squeezed between international and domestic drags.

That leaves its expansion at risk of barely topping 1% this year, a sharp slowdown from 2018, with even continental powerhouse Germany in trouble.

Investors are tuning in. The Bloomberg euro index is near its lowest since mid-2017 and European stocks have never been cheaper relative to bonds in terms of yield gap.

“The concern I have right now is in Europe,” said Salman Ahmed, chief investment strategist at Lombard Odier.

“It’s clear China is going through a slowdown, but there’s also a strong amount of stimulus in the pipeline. However, in Europe, things are deteriorating quite fast.”

The extent and surprising suddenness of the weakness reflects that the slowdown is hitting the core of the region.

While the likes of Greece were at the root of past sluggishness, this time Germany’s prospects are crumbling after a protracted slump in manufacturing.

Household spending has also ground to a halt in France, which is beset by the Yellow Vest protests.

Together those two countries account for about half the eurozone economy.

“If France stops consuming and Germany stops producing you have a major problem in the eurozone,” said Ludovic Subran, deputy chief economist at Allianz.

The problems don’t stop there. Italian bond yields have started to creep higher again amid doubts over fiscal management, the health of banks is questionable and Brexit remains unresolved.

European elections in May could see gains for anti-EU parties, something that’s already worrying some companies.

“Ultimately we are optimistic about the US, but believe that the downside risks have risen sharply in Europe,” said Deutsche Bank chief economist David Folkerts-Landau.

In the meantime, softer growth in China is pinching, with automakers such as Fiat citing weaker demand in the world’s second-largest economy.

That’s filtering through to other companies, with Brussels-based Umicore saying last week that profit will be held back by the global automotive slowdown. — Bloomberg

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