Stronger Euro-area economic growth defies trade war threats

[FRANKFURT] The euro-area economy grew faster in the second quarter than initially reported, suggesting some of the worries about the outlook at the start of the year may have been overdone.

Expansion was revised up to 0.4 per cent from 0.3 per cent, Eurostat said Tuesday, and a jump in investor confidence hints at less gloomy prospects for the second half. Growth in Germany and the Netherlands gathered pace in the three months through June, keeping solid momentum in the overall currency region despite global trade tensions and disappointing performances in France and Italy.

While strong domestic demand has shielded the region so far from the worst effects of protectionism, companies are increasingly concerned about business prospects. New numbers in China hint at a mid-year rough patch for the economy, and there's also turmoil in Turkey that's sent the lira plunging this month and spread to other emerging markets.

Germany's better-than-expected growth of 0.5 per cent was bolstered by an increase in private and government spending. Equipment investment and construction gained "somewhat", the country's statistics office said. Euro-area industrial production fell 0.7 per cent in June, according to a separate Eurostat release.

The specter of a trade war still looms large, even after the European Union and the US pledged not to introduce new levies as long as negotiations to lower trade barriers are ongoing. The ECB said last week that if all threatened measures are implemented, the average US tariff rate would rise to levels not seen for 50 years.

Improved Outlook

"The recent agreement in the trade dispute between the EU and the US has led to a considerable rise in expectations for Germany and also, to a lesser degree, for the eurozone," said Achim Wambach, president of the ZEW Center for European Economic Research.

Its gauge of confidence in the German outlook jumped 11 points to minus 13.7, the highest in three months. Still, "the economic outlook for Germany is now significantly less favorable than it was six months ago," Wambach said.

Carmakers including Volkswagen AG, Daimler AG and BMW AG have warned against the fallout of trade tensions, though some other German companies have expressed optimism.

HeidelbergCement AG confirmed its outlook for 2018 even after negative currency effects damped second-quarter revenue, and cargo container shipping company Hapag-Lloyd AG predicted a better second half and said trade tensions haven't yet left a mark on business.

Growth Driver

Signs have increased recently that momentum in Germany's economy is building, turning the country into the driver of the region's expansion once again. Surveys of private-sector business activity have risen for the past two months, and the Bundesbank says it sees a slight pickup on the back of private consumption.

At the same time, factory orders - a gauge of future output - showed the first annual decline in almost two years in June, the month before the US and the European Union agreed to work toward a trade accord.

"The German economy has withstood the trade tensions fairly well," said Florian Hense, an economist at Berenberg in London. "As German exporters get used to the noise, realise that business keeps coming in at a healthy pace, and the US and the EU get their trade deal, the fear factor should fade and the business environment could turn calmer again."

BLOOMBERG