Trade war escalation puts Europe’s shaky economy back on alert

Trade war escalation puts Europe’s shaky economy back on alert

The US and China are taking another swing at global sentiment, which is bad news for Europe as the economy starts to find its feet after a torrid year. In a week that was supposed to bring progress in trade talks, President Donald Trump boosted tariffs on $200bn of goods and threatened more. China said it will be forced to retaliate, though it hasn’t yet given details.

The escalation will have a global impact, but for the euro area it brings to life one of the “pronounced” risks highlighted this week by the European Commission in its latest (gloomy) economic assessment. The region is also facing its own US deadline: Trump is due to decide by May 18 whether to slap levies on car imports, though the date could be extended. “We’re at a very fragile position in the global economy; we’re seeing an industrial recession in most parts of the world,” said Zurich strategist Guy Miller.

“The uncertainty this creates means the global trade situation, which is already fragile, is going to be very vulnerable.”

The US-China setback follows figures suggesting the euro-area economy was starting to stabilise. First-quarter growth was better than anticipated and surveys of activity bottomed out after tumbling through 2018. In Germany, industrial production and orders grew in March.

But confidence remains fragile, with a commission measure for the eurozone at the weakest in more than two years. “A quarter of our members have exports to the US that were already affected by these ridiculous tariffs,” said EU Chamber of Commerce in China president Mats Harborn. Increasing tariffs to 25pc “will prove extremely damaging to those companies, and the collateral damage will ripple around the globe”.

The latest tit-for-tat is likely to worry EU leaders. They agreed on a trade pact with Trump last year and are working to prevent more tariffs on EU products.

Moreover, Europe’s worries could be moot: The US-China talks may ultimately succeed. A deal would help support the view of a better second half for the euro-area economy. Failure, though, “would mean persistent (trade) uncertainty and flat-lining growth rather than a return above potential next year,” Bank of America Merrill Lynch analysts said in a note.

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