European Commission warns about “major shock” as Brexit and US-China trade war slash growth

Uncertainties and ongoing international trade tensions are stunting the GDP growth of the European economy

European Commission warns about “major shock” as Brexit and US-China trade war slash growth

The European Commission is worried. Even though its latest economic forecast is trying to put a positive spin on where the EU’s economy is going, the executive body is still warning about a “major shock” to the continent’s finances if international trade tensions don’t ease up or intensify. And that’s after the ongoing Brexit proceedings and the US-China trade war caused the predicted GDP growth to be downgraded from 1.9% to 1.4% in 2019.

While Brexit has been delayed to the end of October, the uncertainties surrounding the UK’s divorce from the EU have already caused the European Commission to downgrade its economic growth forecast. However, the report warned it could get worse. “A no deal Brexit would be particularly harmful for the UK but it would also negatively affect the EU27 though to a minor extent,” it said. 

Similarly, Donald Trump’s trade war with China is another huge cause for concern. The report stated: “An escalation of trade tensions could prove to be a major shock and create roadblocks for Europe’s growth trajectory.”

Those two aren’t the only reasons for the downgraded economic forecast though. The report also noted that the manufacturing sector has remained weak. This was particularly worrying for countries like Germany which is facing problems in the automobile industry. And with Trump having proclaimed his willingness to raise tariffs against China by 25% – resulting in a knock-on effect for European manufacturers reliant on international supply chains – it’s easy to see why this could be a concern. 

Nevertheless, the European Commission has reason to attempt a positive spin on the report. For instance, it noted that unemployment across the EU had fallen to 6.4% in March 2019 – the lowest rate recorded since January 2000. The European commission also noted that inflation had dropped from 1.9% in the last quarter of 2018 to 1.4% in the first three months of this year. 

Moreover, the EU’s executive body is also expecting the trade worries to be reduced in 2020, giving the economy a chance to rebound. The European Commission estimated GDP growth next year to strengthen to 1.6% in the EU.

Commenting on the report, Valdis Dombrovskis, vice-president for the Euro and social dialogue, said: “The European economy is showing resilience in the face of a less favourable external environment, including trade tensions. Growth is set to continue in all EU member states and pick up next year, supported by robust domestic demand, steady employment gains and low financing costs. Yet risks to the outlook remain pronounced. On the external side, these include further escalation of trade conflicts and weakness in emerging markets, in particular China. In Europe, we should stay alert to a possible no-deal Brexit, political uncertainty and a possible return of the sovereign-bank loop.”

Uncertainty is the bane of businesses. Hopefully, the European Commission will prove to be right that the unpredictability of international trade will subdue by next year, enabling SMEs to trade more freely which will, as a result, boost the economy. 

Eric Johansson
Eric Johansson

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