Germany’s economy is showing ‘signs of fear’ over US trade dispute, data show

30th july 2018

Trade tensions between the U.S. and Europe could be damaging economic momentum in the region’s biggest economy, Germany. The latest data sets from the country released Tuesday and Wednesday paint something of a mixed snapshot of the economy, analysts believe.

Germany’s composite purchasing manager’s index (PMI) — an indicator of the economic health of the country’s manufacturing and service sectors — hit a five-month high in July, data showed Tuesday, coming in at 55.2, up from June’s 54.8. The increase was driven by a stronger rise in manufacturing, IHS Markit, which collates the data, said. Services, meanwhile, hit a two-month low.

Yet on Wednesday, the country’s influential Ifo Center released its monthly business climate data which showed a fall in business confidence in July, to 101.7 from 101.8 a month before. Business expectations also fell to 98.2 from 98.5 while the assessment of current business conditions rose slightly.

Carsten Brzeski, chief economist at ING Germany, said Wednesday that the latest index “still points to solid growth but trade war fears continue to weigh on expectations.”

“After six drops in the last seven months, German business sentiment recorded another small decrease in July. The divergence between an improving current assessment and weakening expectations suggests that at least up to now, trade fears are only fears and not a drag on growth (yet),” he said in a research note Wednesday.

Trade tensions are at the forefront of U.S.-European relations, particularly Wednesday as the president of the European Commission, Jean-Claude Juncker, visits President Donald Trump at the White House. Trump has threatened to impose a 20 percent tariff on European car imports and wants Europe to reduce its 10 percent tax on U.S. car imports (the U.S. only applies a 2.5 percent tariff currently).

The car spat is expected to dominate the Trump-Juncker agenda Wednesday. Europe has threatened to target $20 billion worth of U.S. goods if the car tariffs go ahead and is already fuming at Trump’s decision to impose tariffs on steel and aluminum that began in June.

‘Wait, see and hope mode’

Remarking on the latest Ifo index numbers, UniCredit’s Chief German Economist Andreas Rees said that companies were in “wait, see and hope” mode.

“They wait and see whether U.S. President Trump imposes car tariffs and extends tariffs on Chinese goods. And, of course, exporters hope for the best,” he said in a note Wednesday. “However, there is the non-negligible risk that German companies could be hit by a double whammy going forward … Carmakers are getting less competitive in the U.S., while companies doing business in China may face headwinds caused by weaker growth impulses (possibly triggered by additional U.S. tariffs),” he said.

Economist Brzeski said in an export-oriented economy like Germany’s — in which the U.S. is still the largest export destination — the prospects of more complicated trade are creating concern. But, he said, Germany shouldn’t be worried.

“For now, the German economy clearly shows sign of fear but does not feel it. In fact, the fear factor is much bigger than the actual hard impact. Why? Currently, actual tariffs on aluminum and steel will not hurt the economy. And given traditional price insensitivity of German goods, even significant U.S. import tariffs on cars might not significantly affect demand; particularly as long as the euro remains weak,” he said.

He noted that simulations showed that the German economy would, not surprisingly, be hit by a fully-fledged trade war, somewhere in the range of 0.1 and 0.4 percent of its annual gross domestic product (GDP). “However, it is still in the German economy’s hand to reduce such a negative impact by increasing domestic investment and strengthening ties with other trade partners.”

Greg Peters, senior portfolio manager at PGIM Fixed Income, told CNBC’s “Street Signs” Wednesday that he believed Germany’s business climate “was OK but not as robust as it was a year ago.” However, J.P. Morgan economist Greg Fuzesi said in a note Wednesday that while the Ifo data was weaker than the latest PMIs, the “details look decent.”

“Taken together, both PMI and Ifo are signalling gross domestic product growth at a 2 percent pace at the start of the third quarter of 2018, but the messages about momentum are mixed across the two surveys,” he said.

Source: CNBC