Europe’s Hopes for a Trade Truce Turnaround Prove Fleeting

(Bloomberg) --

Europe’s industrial engines were supposed to be turning the corner with the new year. 

The U.S.-China trade truce announced in December was supposed to ease uncertainty and revitalize demand for capital goods, consumer durables and energy in the world’s two largest economies and beyond. The U.K. was about to ditch the European Union with nary a noticeable disruption.

Underneath all that, a big monetary stimulus package in September was supposed to give the European Central Bank scope to focus on other issues in Christine Lagarde’s first year as its president. In her debut press conference in December, she struck an upbeat tone, saying there were “some initial signs of stabilization.”

But things rarely go as they’re supposed to. China’s coronavirus is now slowing whatever global growth momentum there was to start the year, and figures out on Wednesday showed European factories were in particularly rough shape entering 2020.

Euro-area industrial output dropped 2.1% in December — the steepest in almost four years. That’s further damping expectations for a meaningful rebound after the 19-nation economy expanded a mere 0.1% in the fourth quarter. German industrial production ended the year shrinking 2.5%, while France dropped 2.9% and Italy fell 2.7%. France and Italy’s economies both contracted at the end of last year, and Germany may have as well (we’ll know more on Friday). 

Now, the coronavirus’ squeeze on supply chains means the call of a European turnaround will likely prove premature. A global economic model on the fallout shows a drag on euro-area GDP growth of 0.1 to 0.2 percentage point in the first quarter, with the Netherlands — a major hub for trade — hit most severely, according to Bloomberg Economics.

Closer to the outbreak, signs of the regional economic costs are just starting to emerge:

• Taiwan lowered its estimate for full-year growth to 2.37% compared with a previous government forecast of 2.72%.
• A key government official in Thailand said growth could be less than 1% in the first quarter, mainly because of the hit to tourism.
• Vietnam’s exports plunged in January and the country’s torrid economy is at risk of slowing to below 6% for the first time in six years. The Vietnamese government said “the impact of the epidemic is spreading globally, causing disruptions in supply chains of many industries.”

Charting the Trade War

JSW Steel’s billion-dollar plan for Making American Steel Great Again depended on tariff exemptions. Two years later, they haven’t materialized — so it’s suing. 

Today’s Must Reads

• London broil | Talks on the post-Brexit future of European capital markets have largely avoided the toxic haggling of the broader trade negotiations — until now.
• Paper trail | In a world dominated by email and smartphones, the shipping industry’s reliance still on paper documents is posing problems during the coronavirus outbreak.
• Scientific decoupling | A leading Harvard nanoscientist is charged with lying about his work in a widening U.S. crackdown on dealings with Beijing.
• EU-Vietnam deal | The European Parliament approved a free-trade agreement with Vietnam after winning concessions from Hanoi that may show the way for a bigger deal between Europe and South America.
• Faint warning | U.S. recession fears inched higher as persistent manufacturing weakness and softer hiring momentum offset surging stock prices at the end of last year.

Economic Analysis

• Freight rates | The shipping market's seasonal low is worsened by coronavirus outbreak.
• December deadline | A Brexit outcome may be a ‘live’ deal and constant regulatory dialogue.

Coming Up

• Feb. 14: EU trade balance
• Feb. 19: Japan trade balance
• Feb. 21: South Korea 20-day exports and imports
• Britain’s departure from the EU on Jan. 31 marked the start of a new, more complex phase of the negotiations. Click here for a timeline to the year ahead.

--With assistance from Jana Randow.

To contact the editor responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss

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