Europe’s hopes for a trade truce turnaround prove fleeting

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% drop 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.