Event

In the wake of the dispute between the US and the EU over the state aid granted to Airbus and Boeing, the WTO recently allowed the US to impose tariffs up to 100% on USD 7.5 billion of European imports. The foreseen tariffs of 10% and 25%, which could enter into force as early as 18 October and remain in place indefinitely, affect different countries and sectors, among which the agri-food sector (whisky, pork products, olive oil, dairy products, etc.), the clothing and textile sector (sweaters, suits, blankets, etc.) and the machinery and equipment sector (metal tools for mechanical and electrical appliances). Although the Airbus consortium is made up of 4 countries (Spain, UK, France and Germany), the tariffs hit all the countries within the European Union, although not all EU countries are targeted for every product. The White House also considers a ‘carousel action’ in order to be able to modify the list of items subject to tariffs, as it sees fit. This feature should further increase uncertainties for businesses in Europe.

Impact

Such new measures would worsen the current difficulties faced by European economies. The manufacturing sector is indeed experiencing a marked slowdown at a global level, since it is the first and most directly impacted victim of the developing trade war and of the consequent weakening of the global trade. Even though the slump is also visible in other regions, especially in the US, Europe, which is additionally impacted by the uncertainty related to the Brexit, is at the core of the deterioration. In particular, the automotive and machinery/equipment sectors come at the forefront of the degradation, as illustrated by sectorial PMIs, considered as leading indicators of the sectorial activity.

Export-oriented Germany, the traditional engine of regional growth and one of the countries most targeted by the new round of US tariffs, is already suffering the heaviest toll. Its September manufacturing PMI stands at 41.7, the lowest over the last 123 months. Based on the latest manufacturing PMIs available for other European countries, the Czech Republic, Austria, Poland, Spain and Italy also see a majority of their manufacturing companies reporting a sharper contraction in September than in August (see graph 1). Additionally, the United Kingdom and Ireland also report a significant contraction in September, but milder than in August (the UK’s manufacturing sector is boosted by the resumption of the stockpiling related to Brexit uncertainty). The Eurozone PMI is also contracting significantly and more so in September than in August.

Regarding the automotive sector in Europe1, volumes of production are expected to decline by almost 2% this year with respect to last year. Besides, automotive manufacturers have to realise heavy investments in the electric vehicle segment, which significantly impacts their margins. They are therefore caught between the drop in demand, the drop in margins and the threat of tremendous fines from the European Commission (for those who do not achieve the CO2 emission reduction targets). Additionally, the sector is threatened by the imposition of further import restrictions by the USA, following the investigation initiated last year under Section 232 of the Trade Expansion Act of 1962. The decision thereof should be issued mid-November at the latest and, if measures are applied, could severely affect the European car industry.

Regarding the machinery sector, volumes of production are expected to grow by a small 2% this year with respect to last year (growth was about 5% and 3% in 2017 and 2018, respectively). The US tariffs on a series of German products will blow a further coup to a sector enduring mounting difficulties. As a result of the highly uncertain environment, German manufacturing companies have already started to reduce production capacities, as indicated by the increase in (partly subsidised) shorter working hour scheme and the announcements of lay-offs.

Analysts: Florence Thiéry – f.thiery@credendo.com; Matthieu Depreter – m.depreter@credendo.com


1 EU plus other advanced European countries.