Industrial production in the Eurozone has contracted for two consecutive months, suggesting that the slowing growth in key markets, an escalation of global trade tensions, as well as the winding down of pre-Brexit stockpiling have dampened activity.
BDO’s latest Export Growth Index has found that EU export growth slumped considerably between the first and second quarters of 2019, hitting its lowest level in almost two years.
Sliding from 99.1 to 97.2 in Q2 2019, the Index – which provides snapshots of the export markets in Europe’s five largest economies – recorded a seven-quarter low.
For the first time since Q3 2017, the UK’s export growth index (99.2) simultaneously exceeded that of France (98.0), Italy (97.0), Spain (95.5) and Germany (93.1). However, our research found that Spain was the only country not to experience a decline in the last quarter, and all of the indices are now below the long-run growth trend for each country (100).
Germany – the EU’s largest economy and exporter – saw the index fall into contraction for the first time since 2016, slipping 4.5 points to 93.1. This is the weakest the index has been since Q3 2013 in the aftermath of the Eurozone crisis.
Poor performance in Germany was largely driven by the country’s dwindling industrial output, which contracted by 2.3% in April, the sharpest monthly decline in almost four years. This is thought to be due in part to the “hangover” effect from the pre-Brexit stockpiling witnessed in Q1 which artificially inflated growth, as the UK purchases more goods from Germany than it does from any other country, including the US and China.
Turning to inflation, the BDO Export Inflation Index dipped to a 12-month low of 100.2 in Q2 2019, mirroring declines in the inflation indices for all five economies assessed.
UK inflation fell from 99.6 to 94.9, with British export price growth entering negative territory for the first time since the start of 2016.
The EU currently purchases more than half of the UK’s total goods exports, meaning that UK export prices as a whole will be significantly impacted by the outcome of Brexit, which could potentially result in the imposition of tariffs across the channel. The UK is also a major purchaser of European goods, meaning that post-Brexit tariffs could affect overall export prices for the rest of the EU.
One of the biggest developments in the global economy over the past year has been the intensification of trade tensions between the US and China. However, this dispute may present future opportunities for Europe. China’s imposition of tariffs on $110bn worth of US goods is likely to mean some Chinese firms will substitute US for European products, providing a boon for EU exporters. Europe’s automotive, aircraft and semiconductor industries could fare particularly well from this.
Peter Hemington is a Corporate Finance Partner at BDO.