But Ms. Lagarde will have to consider what the central bank can do if the situation gets worse.
When Germany’s official statistics office reported that the economy shrank 0.1% in the second quarter, shock waves rippled through stock markets around the world. The reaction reflected the degree to which Germany sets the tone for the Continent. Germany has the eurozone’s biggest economy, accounting for more than a quarter of the bloc’s output. It has the most people, 83 million, and the most workers, who help stoke nearly every other country’s economy. The list of European Union countries that count Germany as their number one trading partner is long. It includes France, Italy, the Netherlands, Belgium, Slovakia and Sweden.
The relationships sometimes border on dependency. Germany accounts for 27% of Poland’s foreign trade. Britain, Poland’s number two trading partner, accounts for only 6% according to World Bank Data. Suppliers throughout Europe earn much of their revenue by selling to big German manufacturers like Daimler, Siemens and ThyssenKrupp. But those companies are already struggling.
Daimler for example, the maker of Mercedes-Benz cars has issued three profit warnings since last October. Siemens, whose products include high-speed trains and equipment for oil and gas producers, this month reported a 6% decline in net profit. And the ratings firm Moody’s downgraded ThyssenKrupp’s debt further into junk territory recently, an indication that the giant steel maker is considered a default risk.
As it strains against the German downdraft, Europe is battling a host of other woes. High on the list is Italy, which has a stagnant economy, an unstable government and one of the highest debt burdens in the world, giving it the potential to touch off another financial crisis.
Another risk is that Britain will leave the European Union without a deal with Brussels, creating chaos in the flow of goods across the English Channel. And car sales are plunging around the world, threatening an important source of jobs in countries like Italy, France, and Slovakia.
The biggest squeeze comes from the trade war. President Trump’s tariffs on a range of Chinese imports and on European steel and aluminum have disrupted supply chains and profoundly unsettled managers who make decisions about how much money to invest in new factory space and how many people to hire. Germany is especially vulnerable to trade tensions because exports account for almost half of the country’s gross domestic product. And it is most sensitive to the downturn in the auto industry because vehicles are the country’s biggest export. Sales of German cars have slumped as Chinese buyers pull back.
It can be difficult to gauge how deeply other individual economies are rattled by the trade war, but the latest numbers across Europe contained troubling signs in our opinion. Eurozone exports fell 5% in June, The European Union’s statistics agency reported recently. Trade accounts for about 1/3 of the bloc’s gross domestic product.
Eurozone growth has already been meager this year. The 19 countries in the currency bloc collectively grew 0.2% from April to June. The European Union, which includes the eurozone plus nine other countries, recorded the same rate.
Spain surprisingly was one of the best performers, registering a growth rate of 0.5% compared with the previous quarter, which helped balance out Germany’s 0.1% decline in output. But Spain and other fast-growing countries like Denmark and Finland are not big enough to replace Germany as Europe’s economic locomotive.
Even if Europe manages to avoid two consecutive quarters of declining output, the technical definition of a recession, no one at Calvin • Farel expects growth to be particularly impressive.
The slowdown in growth in our opinion is everywhere in the eurozone more or less, there is no decoupling.