Domestic demand in the euro area was relatively good in 2018. This was not unusual. Consumers in many economies are doing well. The global unemployment rate is the lowest since 1980. However, as with other economies, international trade was a negative for European growth. What is happening?
The old-fashioned way of looking at exports is not very useful in today's world. Global supply chains are long and complex. Europe's exports to China weakened last year – but what does that tell us? It may not be China's fault. Much of what Europe sells to China spends a few weeks in the country before being exported to another country. If Europe exports parts to China that are made into a product that is sold in the US, then weaker demand in the US will show up as lower exports to China.
Economists can identify where exports finally end up. Those numbers suggest that Chinese consumers did not hurt European exporters too much. What did hurt European exports was a slowdown in capital spending. In many large economies, companies' investment will be 10% to 15% of the economy. However, it is at least twice as important as that for European exports.
Companies invested more slowly at the end of 2018. Trade tensions did not help. In North America, companies seem to have delayed investment while NAFTA was renegotiated. In China companies delayed investment as trade tensions grew. Investment in the UK and investment in Turkey also suffered (for different reasons). Europe's exporters were hurt as a result.
As the chart shows, if global investment steadies or improves in 2019, European exports should stabilize a bit above where they were at the end of 2018. With some more positive signals on US-China trade and some lessening of the NAFTA uncertainty, companies may start to invest again, and, in doing so, demand parts that originate from Europe.
Author: Paul Donovan, Global Chief Economist GWM, UBS AG