Escalating Trade War Puts Europe’s Shaky Economy Back on Alert

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The U.S. and China are taking another swing at global sentiment, bad news for Europe as the economy starts to find its feet after a torrid year.

In a week that was supposed to bring progress in trade talks, President Donald Trump boosted tariffs on $200 billion of goods and threatened more. China said it will be forced to retaliate, though it hasn’t yet given details.

The escalation will have a global impact, but for the euro area it brings to life one of the “pronounced” risks highlighted this week by the European Commission in its latest (gloomy) economic assessment. The region is also facing its own U.S. deadline: Trump is due to decide by May 18 whether to slap levies on car imports, though the date could be extended.

“We’re at a very fragile position in the global economy; we’re seeing an industrial recession in most parts of the world,” Guy Miller, chief market strategist at Zurich Insurance, said on Bloomberg Television on Friday. “The uncertainty this creates means the global trade situation, which is already fragile, is going to be very vulnerable.”

The U.S.-China setback follows figures suggesting the euro-area economy was starting to stabilize. First-quarter growth was better than anticipated and surveys of activity bottomed out after tumbling through 2018. In Germany, industrial production and factory orders grew in March.

But confidence remains fragile, with a commission measure for the euro zone at the weakest point in more than two years.

“A quarter of our members have exports to the U.S. that were already affected by these ridiculous tariffs," said Mats Harborn, president of the European Union Chamber of Commerce in China. Increasing tariffs to 25% "will prove extremely damaging to those companies, and the collateral damage will ripple around the globe."

The latest tit-for-tat is likely to worry European Union leaders. They agreed on a trade pact with Trump last year and are working to enact a deal preventing more tariffs on European products. Commission chief Jean-Claude Juncker this week expressed confidence that the transatlantic truce will hold.

Moreover, Europe’s worries could be moot: The U.S.-China talks may ultimately succeed. President Xi Jinping’s top trade envoy is in Washington, and negotiations were due to resume Friday.

A deal would help support the view of a better second half for the euro-area economy. Failure, on the other hand, “would mean persistent (trade) uncertainty and flat-lining growth rather than a return above potential next year,” Bank of America Merrill Lynch analysts said in a note.

--With assistance from Matthew Miller, Jeffrey Black and Richard Bravo.

To contact the reporter on this story: Fergal O'Brien in Zurich at fobrien@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, Paul Sillitoe

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