Euro-area growth defies trade war threats

Meanwhile, the ECB should keep providing a shield to avoid a dismantling of the entire euro system

By BLOOMBERG

FRANKFURT • The euroarea economy grew faster in the second quarter (2Q) than initially reported, suggesting some of the worries about the outlook at the start of the year may have been overdone.

Expansion was revised up to 0.4% from 0.3%, Eurostat said yesterday, and a jump in investor confidence hints at less gloomy prospects for the second half (2H).

Growth in Germany and the Netherlands gathered pace in the three months through June, keeping solid momentum in the overall currency region despite global trade tensions and disappointing performances in France and Italy.

While strong domestic demand has shielded the region so far from the worst effects of protectionism, companies are increasingly concerned about business prospects.

New numbers in China hint at a mid-year rough patch for the economy, and there’s also turmoil in Turkey that’s sent the lira plunging this month and spread to other emerging markets.

Germany’s better than expected growth of 0.5% was bolstered by an increase in private and government spending.

Equipment investment and construction gained “somewhat”, the country’s statistics office said.

Euro-area industrial production fell 0.7% in June, according to a separate Eurostat release.

The spectre of a trade war still looms large, even after the European Union (EU) and the US pledged not to introduce new levies as long as negotiations to lower trade barriers are ongoing.

The European Central Bank (ECB) said last week that if all threatened measures are implemented, the average US tariff rate would rise to levels not seen for 50 years.

Improved Outlook
“The recent agreement in the trade dispute between the EU and the US has led to a considerable rise in expectations for Germany and also, to a lesser degree, for the eurozone,” said Achim Wambach, president of the ZEW Centre for European Economic Research.

Its gauge of confidence in the German outlook jumped 11 points to minus 13.7, the highest in three months. Still, “the economic outlook for Germany is now significantly less favourable than it was six months ago”, Wambach said.

Carmaker s including Volkswagen AG, Daimler AG and BMW AG have warned against the fallout of trade tensions, though some other German companies have expressed optimism.

HeidelbergCement AG confirmed its outlook for 2018 even after negative currency effects damped 2Q revenue, and cargo container shipping company Hapag-Lloyd AG predicted a better 2H and said trade tensions haven’t yet left a mark on business.

Growth Driver
Signs have increased recently that momentum in Germany’s economy is building, turning the country into the driver of the region’s expansion once again.

Surveys of private-sector business activity have risen for the past two months, and the Bundesbank said it sees a slight pickup on the back of private consumption.

At the same time, factory orders — a gauge of future output — showed the first annual decline in almost two years in June, the month before the US and the EU agreed to work toward a trade accord.

“The German economy has withstood the trade tensions fairly well,” said Florian Hense, an economist at Berenberg in London. “As German exporters get used to the noise, realise that business keeps coming in at a healthy pace, and the US and the EU get their trade deal, the fear factor should fade and the business environment could turn calmer again.”

ECB Urged to Shield Members
Meanwhile, the ECB should keep providing a shield to the government securities of all monetary union members to avoid a dismantling of the entire euro system, a top lawmaker from Italy’s ruling coalition said.

“There cannot be a system at the mercy of market movements” without any shields by the central bank, Claudio Borghi, the eurosceptic head of the budget committee in Italy’s lower house, said in an interview on Monday.

“Nowadays, there is a system that has a residual amount of quantitative easing, but with everybody knowing that this is being phased out and will come to an end soon.”

The League lawmaker’s call for the ECB to provide a guarantee to the periphery of the euro region follows two separate posts on Twitter in which he noted that the spreads of bonds issued by other nations such as Spain’s over Germany’s are also widening.

He added that “either the ECB guarantee will come or everything will be dismantled” in a reference to the euro system.

Investors Turning
With investors turning against Turkey, the government in Rome is trying to avoid Italy being next in line. Italy has had contacts with the ECB to discuss the risk of a speculative attack on its debt, a person familiar with the situation said earlier on Monday.

“It is significant that an external event like Turkey, that has nothing to do with Italy, unleashes such an effect,” lawmaker Borghi said.

“All know the fence that protects the prey will soon be lifted and the financial speculation easily sees the periphery’s debt as an easy target and is positioning itself ahead of the next developments,” he said in a reference to the phasing out of the ECB’s bond-purchasing programme.