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US-China trade war leaves Europe as collateral damage

FRANKFURT, Germany (AP) — Like a sleek Mercedes crunched between two freight trucks, Europe’s economy is being knocked off course by the conflict between the U.S. and China over trade.

The bill for damages from the U.S-China collision will likely be reflected in new growth figures due Wednesday that could show Europe’s economic motor, Germany, is stalled or shrinking. Beyond that, economists say there are signs that years of declining unemployment since the depths of the Great Recession and the eurozone debt crisis may be ending.

And if the trade wars escalate to include higher U.S. tariffs on cars made in Europe, the picture could look even worse.

The heart of the matter is Germany, Europe’s largest economy and a key trade partner of both the U.S. and China.

Exports amount to almost half the German economy – 47%, according to the World Bank — as its companies play a dominant role in global markets for luxury autos and complex industrial machinery. Supply chains from Germany extend into neighboring eurozone countries as well, while German profits are often invested in factories in places like Slovakia, Hungary and Poland. Great when trade is booming — but it means Germany remains more vulnerable than less open economies such as Portugal or France to a slowdown in global trade in goods and services.

And that is what’s happening.

German has spewed wretched economic data for weeks: an 8% annual fall in exports in June, a 1.5% drop in industrial production in June from the month before, three times bigger than expected. Surveys of executives suggest the industrial sector is in recession, with consumer demand and services propping up the economy.

But the damage from trade uncertainty may be spreading to consumers and companies that do business only at home.

While German unemployment remains low at 3.1%, job gains have stalled recently. Growth in the eurozone as a whole halved to 0.2% in the second quarter compared with the first. Italy, the third largest economy in the eurozone, was another weak spot, with zero growth after only 0.1% in the first quarter.

One unsettling sign is that investment in new plants and equipment across the eurozone has weakened this year even as factory capacity utilization remains relatively strong . That is a departure from the longer term pattern, and suggests that managers don’t see stronger sales and profits ahead.

Ironically, trade between Germany and the U.S. and between Germany and China is holding up pretty well. It’s mainly the uncertainty about the outcome of the clash between U.S. President Donald Trump and the Chinese Communist leadership that has been weighing on business confidence and deterring decisions to invest and buy across global markets. Last week, Trump imposed a 10% tariff on an additional $300 billion in Chinese goods effective Sept. 1.

As a result, research firm Oxford Economics forecasts world trade growth of just 1.2% this year, far below last year’s 4.9% rise.

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