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Eurozone Economy Falls Further Behind U.S.

The eurozone economy slowed sharply this summer, posting the weakest quarter in five years, as the region begins to suffer from a slowdown in China and turmoil in Italy takes a toll.

Tuesday’s figures also suggest that the outlook for the bloc remains uncertain. With China’s economy slowing, the global economy seems set to cool this year, even as the U.S. enjoys a spurt of activity driven by robust consumer and government spending. While the eurozone economy kept pace with the U.S. in 2016 and 2017, it has fallen behind it this year.

The European Union’s statistics agency Tuesday reported that gross domestic product in the currency area’s 19 members rose at an annualized rate of 0.6% in the three months through September, a slowdown from the 1.8% in the second quarter and well below the 3.5% registered in the U.S. during the same period.

It was the slowest expansion since the first three months of 2013, when output contracted as the eurozone remained in the grip of its government debt and banking crisis. Economists surveyed by The Wall Street Journal last week had expected growth to continue at the same pace as in the second quarter.

Some of the lost growth may be recovered in the final months of the year, since output was temporarily suppressed by German delays in testing automobiles for compliance with new emissions standards. Germany didn’t publish growth figures Tuesday, and won’t until mid-November, but the country’s central bank last week said GDP may have flat lined in the third quarter.

Volkswagen AG, Germany’s largest automobile manufacturer, Tuesday said emissions testing contributed to a drop in sales during the quarter. That comes as European auto makers are tackling a shift in demand from gasoline-fueled vehicles toward battery-powered alternatives.

France released figures, which showed its economy picked up after a weak first six months, but Italy’s economy flat lined for the first time since the end of 2014.

The eurozone economy faces plenty of challenges in the months to come, including the possibility that one of its largest export markets — the U.K. — will sever its ties with the EU without having agreed new trading arrangements. Italy’s standoff with the rest of the bloc over a rules-busting budget has already raised borrowing costs in the eurozone’s third-largest economy.

The other big worry is that a series of trade disputes with the U.S. will hit demand for the eurozone’s exports, which are already under pressure from slowing demand in some large developing countries.

The currency area’s economy recorded its strongest year in a decade last year, largely down to a surge in manufacturing output as overseas sales jumped. But that has reversed in 2018, with China playing a key role.

While eurozone exports to China in the first eight months of 2017 were up 19.2% from the same period in the previous year, they were up just 3.3% in 2018. Some businesses see a link between that cooling and the uncertainty created by unresolved trade tensions between the U.S. and China.

Volkswagen on Tuesday said a “significant” drop in its Chinese sales during the third quarter was attributable to the trade dispute between China and the U.S. having dampened business and consumer confidence. Other German manufacturers are also feeling the chill.

“Chinese demand has slowed noticeably since this summer,” said Andreas Möller, a spokesman for German machine-tool maker Trumpf GmbH + Co. “If the U.S. and China are feuding over trade rules, then that’s of course going to leave a mark on our business.”

In the financial year that ended June, China was the second-largest market for Trumpf, after Germany but ahead of the U.S.

While businesses elsewhere in the eurozone haven’t seen a similar hit, it is a key worry for many.

“Looking ahead we are worried about China,” said Maurizio Casasco, chairman of Confapi, an association representing small and midsize Italian companies. “We are watching closely the U.S.-China [tariff] discussions and are aware that if the standoff continues we could be collateral damage. Italy risks paying the consequences for something that is completely out of our control.”

For now, the eurozone’s slowdown is unlikely to derail the European Central Bank’s plans to withdraw some of the stimulus it has provided since mid-2014. Last week, ECB President Mario Draghi said there had been a loss of momentum, but no sign as yet of “a downturn.”

“It’s not simple here to distinguish what is transitory from what is going to be permanent, what is country specific from what is extended to the whole of the euro area,” he said.

Most economists expect to see a small rebound in eurozone growth during the final quarter of the year as Germany’s automobile industry returns to normal and falling unemployment continues to support household spending.

But there are few signs that growth will get anywhere near its 2017 peak next year, and reasons to fear it will be even softer than what looks almost certain to be a disappointing 2018. A survey released by the European Commission on Tuesday found consumer and business confidence slipped to its weakest level since May 2017 in October, an indication that household spending and investment by companies is unlikely to rally significantly over coming months.
Source: Dow Jones

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