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Brexit Fears And Miserable Motor Trade Do Not Auger Well For The European Economy

The Euro zone economy has been spluttering during September following a sharp decline in global trade and the threat of a “no-deal” Brexit still looms large.

It is not a good signal as the data for Q3 2019 will probably not improve from the May through June period.

The Euro zone quarterly economic growth was confirmed at 0.2% in Q2 of 2019, slowing from a 0.4% expansion in Q1. Household consumption and fixed investment were the only supportive factors in the expansion. In contrast, net trade i.e. exports less imports, contributed negatively to aggregate demand and hence growth. The change in inventories was minimal and so of little economic impact.

One must always look to Germany as the bloc’s leading economy to take the pulse of Europe.

Sadly, German GDP growth was -0.1% while Italy’s economy flatlined. Spanish GDP growth was booked at +0.5%, the same as in Q1 whilst the French economy expanded at 0.3%, the same pace as in the first quarter.

These figures are worrying as the latest snapshots of how Q3 may shape up reveal that once again Germany is the main driver of the slump. Manufacturing accounts for 22% of all German GDP so it is a concern to see the weakness in manufacturing sentiment.

The IHS Markit Germany Manufacturing PMI fell to 41.4 in September 2019 from 43.5 in the previous month. This was below market expectations of 44.0. This latest reading highlights the steepest contraction in factory activity since the global financial crisis in mid-2009, as output declined at the sharpest pace since July 2012. New business activities declined more rapidly than at any time in the past decade given weaker overseas demand.

Also, the rate of job losses was booked at the fastest since January 2010 so leading sentiment to be at the weakest recorded since this series began in July 2012. Identified as reasons for uncertainty was the broad economic outlook and falling sales in the automotive sector and of course Brexit.

At least France is expanding, for now, however, the trend is not looking good. The IHS Markit France Manufacturing PMI dropped to 50.3 in September 2019 from 51.1 in the previous month. A reading well beneath market expectations of 51.2.

Output and new order levels shrank, led by a decline in new export sales. Meanwhile, employment and backlogs of work continued to increase.

Optimism among business executives fell to its lowest level for seven years as motor car manufacturers were among the worst hit. European car sales fell sharply in August, deepening the woes of an industry battling sluggish demand in key markets and the challenge of rolling out electric vehicles.

Registrations dropped 8.4%, the steepest monthly decline this year, according to the European Automobile Manufacturers Association.

In addition to the risk of a recession in Germany, carmakers are also facing a slowdown in the Chinese car market. European sales over the year to date are down 3.2% and the continent’s five biggest markets all contracted in August, with Spain and France posting the biggest slowdowns.

In a joint statement the CEO’s of 23 automotive business associations across Europe cautioned against the U.K. leaving without an agreement, saying it would lead to huge extra costs and possible job losses across the European motor manufacturing base.

Euro-area economic growth is forecast to slow to 1.1% this year from 1.9% in 2018, which would be its worst performance in six years. The weakness in industry hasn’t had a dramatic impact on employment so far. The Euro zone seasonally adjusted unemployment rate stood at 7.5% in July, unchanged from the previous month’s 11-year low and in line with market expectations.

That is no reason to be complacent as the Business Climate Indicator (BCI) for the Euro zone dropped by 0.34 points from the previous month to -0.22 in September. This marked the lowest level since August 2013 and below market expectations of 0.11. All the components of the BCI worsened as managerial assessments of production plans, export order books and overall order books retreated heavily.

If the U.K. does crash out with “no-deal”, the pain will not only be a British burden, it will prove to be a curse on the continent as well.
Source: Forbes

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