July 25, 2018 / 8:39 AM / 25 days ago

Trump's trade policy darkens German corporate mood in July

BERLIN (Reuters) - German business confidence dipped in July, suggesting a slew of risks, including the threat of U.S. tariffs on cars and car parts, is starting to unsettle company executives in Europe’s largest economy.

FILE PHOTO - The Frankfurt skyline with its financial district is photographed on early evening in Frankfurt, Germany, March 25, 2018. REUTERS/Kai Pfaffenbach

The Munich-based Ifo economic institute said on Wednesday its business climate index fell to 101.7 from 101.8 in June, but it did not register as big a drop as forecast. Economists polled by Reuters had expected a reading of 101.5.

U.S. President Donald Trump’s trade policy, along with a recent government crisis in Germany that was caused by a dispute over migration but which has since been resolved, increased uncertainty, Ifo economist Klaus Wohlrabe told Reuters.

“In an export-oriented economy - in which the U.S. is still the largest export destination - the prospects of more complicated trade are creating concern,” ING economist Carsten Brzeski said. “For now, the German economy clearly shows sign of fear but does not feel it.”

Companies felt slightly more upbeat about their current situation, but their expectations for the coming six months worsened, the survey showed.

“The current debate about tariffs probably made itself felt there - the trade disputes are making life in the corporate sector harder,” said Thomas Gitzel, chief economist at VP Bank.

Citing national security grounds, Washington imposed tariffs on steel and aluminum imports from the European Union, Canada and Mexico on June 1.

Now Trump is threatening to extend them to EU cars and car parts - a worry for Germany, where the car industry accounts for some 800,000 jobs.

While overall export expectations picked up for the first time in seven months, they fell significantly in the auto industry, Wohlrabe said.

The DIHK Chambers of Commerce estimates U.S. tariffs on imported cars would slash around 6 billion euros off economic output.

At the weekend, Economy Minister Peter Altmaier said it was difficult to estimate the impact of any U.S. car tariffs on the German economy. But tariffs on aluminum and steel were worth just over 6 billion euros ($7.02 billion), he said, and car tariffs would probably be about 10 times that.

European Commission President Jean-Claude Juncker will discuss trade with Trump at a meeting in Washington on Wednesday. Trump tweeted on Tuesday night that the United States and the European Union should drop all tariffs, barriers and subsidies, adding: “Hope they do it, we are ready - but they won’t!”

CONTINUED ROBUST GROWTH

The Ifo survey showed morale weakening in the manufacturing and trade sectors while it picked up in the service and construction branches.

It comes after a survey published earlier this month showed the mood among German investors slumped to its lowest since August 2012 amid concern about escalating trade tensions with the United States.

Nonetheless economists said the Ifo index, which has fallen in six of the last seven months, pointed to continued solid growth in Germany.

The government has said it expects growth to accelerate slightly in the second quarter from 0.3 percent in the first three months of the year, despite the risks that the threat of a global trade war and Brexit pose.

Other recent data has painted a bright picture, with exports, industrial output and factory orders all rising while private sector activity grew faster than expected.

“The German economy continues to expand, but at a slower pace,” said Ifo chief Clemens Fuest.

($1 = 0.8553 euros)

Additional reporting by Joern Poltz in Munich, writing by Michelle Martin, editing by Paul Carrel and Jon Boyle

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