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Eurozone Business Confidence Holds Up in Face of Fresh Tariffs

Businesses across the eurozone remained upbeat about their prospects in June, even as new tariffs were imposed on trade between the European Union and the U.S., with fears that more will follow.

The European Commission Thursday said its measures of confidence among manufacturers and service providers were unchanged from May, while a drop-in consumer sentiment led to a decline in its Economic Sentiment Indicator—an aggregate measure of consumer and business confidence—to 112.3 from 112.5 in May.

The resilience of business confidence in the face of rising trade tensions will come as a relief to the European Central Bank, which has expressed concerns that the threat of greater protectionism could make businesses more cautious in both their investment and hiring plans. It also suggests that a period of slowing growth may be coming to an end, following surveys of activity released last week that recorded a first rise in business activity after four months of softening during June.

The ECB’s economists earlier this month cut their growth forecast for this year in response to a weak first quarter, but policy makers nevertheless said they expect to end a program of bond purchases known as quantitative easing in December. This is based on their view that growth would continue to be “solid and broad-based.”

The steadiness of sentiment among manufacturers, who are more reliant on international trade than service providers, was a surprise: economists surveyed by The Wall Street Journal last week had expected to see a slight drop.

Last month, U.S. President Donald Trump imposed tariffs on steel and aluminum imports from the EU, as well as Canada and Mexico. The EU retaliated by placing its own tariffs on €2.8 billion ($3.25 billion) of imports from the U.S., including bourbon whiskey and Harley-Davidson motorcycles. Mr. Trump subsequently repeated his threat to place tariffs on European cars.

Economists don’t expect those measures to have a significant impact on eurozone economic growth.

“It is very important to note that we are not in a global trade war,” analysts at UBS wrote in a note to clients. “As long as the frictions are absent across emerging markets or between the eurozone and its trading partners, the chances are high that the global recovery can continue. The expansion may be a bit slower than last year.”

There are other signs that the trade conflict has yet to dampen confidence. Figures released by the European Central Bank Wednesday showed businesses increased their borrowing by €24 billion in May, representing an increase of 2.7% on a year earlier, a pickup from the 2.3% growth rate recorded in April. Higher borrowing is usually associated with increased investment.

 

Source: https://www.wsj.com/articles/eurozone-business-confidence-holds-up-in-face-of-fresh-tariffs-1530176473

 

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