Investment remains distinct from consumption expenditures
In the heart of Europe, Germany is experiencing a slowdown, with a slight decline in economic performance in the second quarter compared to the first. According to preliminary estimates published by Eurostat, the seasonally adjusted gross domestic product (GDP) in the euro area grew by only 0.1 percent, and in the EU by 0.2 percent, in the second quarter of the year.
This contrasts with the first quarter, which saw stronger GDP growth - by 0.6 percent in the euro area and 0.5 percent in the EU. The sluggish growth in the second quarter has raised concerns among economists, with the Mannheim Centre for European Economic Research reporting that economic optimism continued to rise in July.
However, the economic situation is not uniform across Europe. France and Italy, which are less dependent on exports, are expected to experience less economic impact compared to Germany. Meanwhile, the U.S. President Donald Trump's trade deal with European Commission President Ursula von der Leyen has resulted in a potential economic slowdown in Germany, with growth predicted to lose between 0.13 and 0.3 percent for the year.
The international trade conflict is becoming more visible, with the economic headwind from abroad weakening growth in the eurozone and the domestic economy also sending negative signals. Exports from the euro area fell again in May, while domestic demand remains sluggish and construction production has decreased.
The departure of the European Union (EU) from World Trade Organization (WTO) free trade rules could lead to significant long-term economic consequences. The EU's recent unilateral trade deals that violate WTO rules risk undermining the rules-based system, encouraging retaliatory measures, and increasing the risk of escalating trade wars and tariff barriers. This could hurt exporters and complicate global supply chains.
In response, the EU may need to seek new coalitions with other affected economies to establish alternative trade frameworks to uphold rule-based free trade. There is also growing discussion within the EU about creating alternatives or reforms to the WTO framework to maintain global trade order without reliance on the US position.
On a positive note, the alliance "Made for Germany" has promised additional billion investments, leading to a change in mood. Economic policy signals from Berlin, such as "growth boosters" and infrastructure billions, are also bringing a mood lift in the private sector. The corporations involved in the alliance are also pushing for swift reforms in their favor.
However, investments remain weak in Germany, according to Barkow Consulting, with lower credit demand. Higher consumer spending could not compensate for the weakness in investments, emphasizes the institute for macroeconomics and cyclical research (IMK).
The agreement in the trade dispute between the EU and the USA has brought more planning security, according to the German Institute for Economic Research. Yet, the EU's acceptance of leaving the WTO's free trade rules could have more serious consequences in the long run.
In summary, the EU stepping away from WTO free trade rules threatens the stability of its trading environment by increasing trade frictions and tariffs, reducing economic growth prospects, and risking the fragmentation of the global trade system. The EU’s long-term economic health will likely depend on how it navigates building new partnerships or reforming global trade governance to replace the weakened multilateral system.
[1] Source: The Financial Times [2] Source: The Economist [3] Source: The Guardian [4] Source: Reuters
- Businesses in Germany might face significant challenges due to the potential economic slowdown, caused partly by the international trade conflict and the EU's departure from World Trade Organization free trade rules.
- Despite the financial implications of these changes, the German government and private sectors are taking steps to stimulate growth through initiatives like the "Made for Germany" alliance and growth-boosting economic policies.
