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Europe's economy not yet on solid ground as business sweats

Zurich

EUROPE has a long way to go if it's to deliver on the hope sparked by recent economic numbers.

While there are hints that the bloc's sharp deceleration is ending, there's no escaping fresh doubts over global trade, ongoing weakness in German manufacturing, uncertainty over China's growth, and Brexit. That's got some of Europe's big corporate names continuing to warn of a "volatile" backdrop.

Euro-area GDP growth topped expectations at 0.4 per cent in the first quarter, and a similar number is predicted on Wednesday from Germany, the region's biggest economy. That would signal the outlook isn't as bad as feared, but sustaining the upturn probably requires a clear improvement in confidence to help investment and demand. A European Commission sentiment measure has been falling almost non-stop and is down 9 per cent since the start of 2018.

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A swift reversal looks less likely since the US unleashed new trade tariffs on China on Friday, and China said it'll retaliate. Add escalating tensions in the Middle East and oil prices up 30 per cent this year and it's a mix that doesn't appear conducive to inspiring "animal spirits".

The car industry is under particular pressure. It was already facing issues including weaker Chinese demand, disruption from new emissions tests, and the transition to electric. US tariffs - President Donald Trump is due to decide by May 18 whether to slap levies on car imports, though the date could be extended - would be a damaging blow.

On a call to discuss earnings last week, BMW chairman Harald Krueger described 2019 as "another challenging year; our environment remains volatile and dominated by uncertainty". Volkswagen's Audi suffered a 13 per cent slide in April sales, and such results are spilling over to suppliers. Car parts maker Continental on Thursday reported a drop in first-quarter income, though it sees a better second half.

"The economic backdrop remains uncertain - German industry has not clearly emerged from its soft patch and the threat of US auto tariffs continues to loom," Chris Hare, an economist at HSBC, said in a report on Monday. "There are plenty of reasons to remain cautious about the growth outlook for Europe."

Economists currently foresee euro-area growth in 2019 of 1.1 per cent, less than half the pace projected for the US. The bloc's better first quarter means that could be revised up, but the damage so far has already pushed the European Central Bank to delay interest-rate hikes, and German 10-year bond yields have tumbled below zero

At Carrefour, the French retail giant, chief financial officer Matthieu Malige called the backdrop "challenging and volatile", and noted "political and social instabilities'' in Europe. It's seen some of those first hand in the violence surrounding the Yellow Vest protests.

In Italy, where Carrefour also has stores, the fractious coalition government appears to be barely holding together amid disagreement after disagreement. The country's economy, sluggish at best, and its mountain of debt are another problem.

Along with weaker demand, companies are being pounded by higher raw material costs, notably energy. Consumer goods maker Henkel described an "increasingly challenging'' environment as it posted earnings below expectations. "The market continues to be volatile as evidenced by the most recent hike in crude oil prices,'' said CEO Hans Van Bylen.

It's a lot for European Central Bank officials to digest as the mid-year point approaches. They'll hold their next policy meeting in early June, when their assessment of the economy will determine the terms they put on new loans soon to be offered to banks. ECB Governing Council member Ardo Hansson said in a Bloomberg interview last week that there are "green shoots", and it's worth waiting a while to judge if the economy needs more stimulus.

"We've touched the trough and it should improve again," said Christoph Weil, an economist at Commerzbank. "The risk is of course the trade war, not only between the US and China but with Europe." BLOOMBERG