Europe’s economy is slowing again as its factories count the cost of increased uncertainty about global trade rules, underpinning worries at the Federal Reserve about the impact of weaker world demand on U.S. growth.
The slowdown is a fresh indication that the global economy had a weak second quarter, with the U.S. and China also losing some momentum in the three months through June. The prospect of a global slowdown has prompted a number of central banks, including the Fed, to provide fresh stimulus or consider such a move.
Fed Chairman Jerome Powell indicated in testimony to U.S. lawmakers earlier this month that weakness in Asia and Europe was a leading motivation for easier policy from the Fed, which is expected to lower its benchmark short-term rate by one quarter percentage point after its two-day meeting ends Wednesday.
“I would say that’s the main thing I worry about,” he said.
The eurozone’s weakness in the second quarter makes it more likely that the European Central Bank will announce new stimulus measures in September in an effort to limit the negative impact from a declining manufacturing sector on the rest of the economy, which is in better shape.
ECB President Mario Draghi last week said the economic outlook for the currency area was becoming “worse and worse.”
“The reasons were basically found to be in the general uncertainty that’s now been with us for several months, actually more than a year, and which relates as I said many times to trade wars,” he told reporters after announcing preparations to launch new stimulus programs.
The eurozone economy has been slowing since the start of 2018, although it picked up a little in the first three months of this year. Figures released Wednesday by the European Union’s statistics agency showed that was a false dawn, with gross domestic product growing at an annualized 0.8% rate in the three months through June, a slowdown from 1.8%. During the same period, the U.S. economy grew 2.1%.
That slowdown has been led by manufacturing, particularly factories in Germany and Italy, the two eurozone economies that are most dependent on the sector. Germany has yet to release official figures for the second quarter, although its central bank estimates that GDP fell during the period. Italy on Wednesday reported that its economy stagnated in the three months through June, while growth in France and Spain slowed.
Manufacturers say some of the slowdown in activity is due to a reluctance on the part of customers to place big new orders that would keep them busy for months to come.
“What we see is that clients are making short-term, small orders and tend not to build a stock,” said Mario Caldonazzo, chief executive of Arvedi Group, an Italian steelmaker. “The key issue is the U.S.-China trade clash, which brings fears of rising tariffs and high uncertainty. Uncertainty is the main enemy of the economy.”
European businesses had hoped to see some of that uncertainty ease during the second quarter, but were disappointed with the outcome of a much-anticipated meeting between President Trump and Chinese President Xi Jinping at a Group of 20 meeting in late June.
“There were a lot of people hovering for the outcome of G-20 in terms of some of their strategic calls,” said William McDermott, chief executive of German business software maker SAP SE, which attributed a dive in its software licensing business in the latest quarter to uncertainty in the Asian market.
That disappointment has delivered a fresh blow to manufacturing confidence, which fell to its lowest level for six years in July, according to a monthly survey by the European Commission.
Trade uncertainty isn’t the only drag on European manufacturing. Automobile makers wrestling with new rules on carbon emissions and an anticipated shift away from gasoline have seen sales fall 3.1% in the first six months of the year from the same period in 2018.
The U.K.’s departure from the EU is also a source of volatility. Ahead of the previous March 29 Brexit deadline, British buyers stockpiled goods to avoid shortages, boosting output at their European suppliers. But that turned into a drag on growth in the second quarter as the departure date was delayed until Oct. 31, and British businesses drew on their inventories.
There is now a heightened likelihood that the U.K. will leave the EU without an agreement to smooth its exit, which would be a further blow to eurozone manufacturers. Ireland’s central bank Wednesday warned that economic growth in the eurozone member with the closest ties to Britain would slow sharply to 0.7% next year in the event of a no-deal Brexit, compared with 4.1% if the U.K. left on agreed terms.
For now, the rest of the eurozone economy is in better shape than the currency area’s factories. Figures also released Wednesday showed the jobless rate fell to 7.5% in June from 7.6% in May to hit its lowest level since July 2008. That is a boon for retailers and service providers as household spending power rises. Some businesses in the eurozone’s stronger north are finding it difficult to hire.
“We see a much more competitive market, and, really, a war on talent,” said Angelique Schouten, chief commercial officer at Ohpen, an Amsterdam-based financial technology company.
But other parts of the economy may suffer if factories lay off workers—and there are signs that has started to happen in Germany.
Recent indicators suggest the economy may have slowed again at the start of the third quarter. Last week, data firm IHS Markit said its composite Purchasing Managers Index—a measure of activity in the manufacturing and services sectors—slipped again in July.
Another worry for the ECB is the low rate of inflation, which fell to 1.1% in July from 1.3% in June, well under the ECB’s target of just below 2%.
If it does cut its key interest rate in September, the ECB will join a number of central banks around the world in easing policy to support fading growth. Since April, central banks in New Zealand, India, Malaysia, the Philippines, South Africa, Russia, Turkey, Indonesia and Australia have lowered their key rates.
However, some economists have questioned whether central banks will succeed in propping up the global economy, a decade after steering it through the global financial crisis.
“We’re skeptical,” wrote Morgan Stanley economist Chetan Ahya in a note to clients. “The key to reviving corporate confidence and growth lies in addressing the fundamental economic headwind of the day—deleveraging earlier in this cycle and trade tensions today.”
—Giovanni Legorano in Rome, Sara Germano in Berlin, Alexa Corse in London and Nick Timiraos in Washington, D.C., contributed to this article.
Write to Paul Hannon at firstname.lastname@example.org
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